A Brief Summary of Medical Savings Accounts

The Kassebaum-Kennedy bill (HR 3103) which was passed allows a four year pilot MSA program that would allow no more than 750,000 policies limited to a pool of individuals employed at firms with 50 or fewer employees and those who are self-employed. Each policy could, in theory, cover up to 50 employees. Any firm that has 50 or less employees could grow to 200 employees and still offer MSAs to all its employees.

In addition, anyone without insurance would be eligible on an unlimited basis -- until the pool exhausted its 750,000 policy limit. However, any uninsured would not count against the 750,000 policy limit. It is projected that the average MSA policy will cover 2.2 people per policy. This would cover approximately 2 million people in MSAs.

At the end of four years, Congress would have to vote before the program could be expanded to others. All of those who were permitted to sign up in the first four years would be entitled to continue the accounts, even if Congress did not decide to expand the program. However, the 105th Congress could vote to extend MSAs to the whole population.


Also in the bill, guidelines are set for the maximum deductible and out-of-pocket expenses permitted before a medical savings account plan can qualify for favorable tax treatment. These are expected to be $2,250 for the maximum deductible and not below $1,500 for the minimum deductible. Also, there would be a $3,000 limit for out-of-pocket in the case of individuals. For families $4,500 would be the maximum deductible and $3,000 the minimum deductible. The cap would be $5,500 for out-of-pocket for families. Annual contributions to the account also would be limited to 65% of the high deductible in the case of individual coverage and 75% in the case of family coverage.

Money Rollover and Non-medical Charges

Any money that is left in the Medical Savings Account can be rolled over to the next year for future health care treatment. Distributions that are not for medical expenses are includible in income. Such distributions are also subject to an additional 15% tax unless made after age 65, death, or disability. Regular income tax rules would apply.

Rules and Reports

  1. During 1997-2000, the Department of the Treasury will evaluate MSA participation and reduction in Federal revenues due to such participation and make such reports of such evaluations to the Congress as the Secretary determines appropriate.

  2. The General Accounting Office is directed to contract with an organization with expertise in health economics, health insurance markets and actuarial science to conduct a study regarding the effects of MSAs in the small group market on (1) selection (including adverse selection), (2) health costs, including the impact of premiums of individuals with comprehensive coverage, (3) use of preventive care, (4) consumer choice, (5) the scope of coverage of high deductible plans purchased in conjunction with an MSA and (6) other relevant issues to be submitted to the Congress by January 1, 1999.

  3. On or before June 1, 1997, each trustee or custodian of an MSA is required to report to the Internal Revenue Service the total number of MSAs established as of April 30, 1997, for which it acts as trustee or custodian, including the number of MSAs established for previously uninsured individuals. In 1998 and succeeding years, on or a before August 1 of the year, each trustee or custodian of an MSA is required to report to the IRS the total number of MSAs established as of June 30 for the current year, including the number of MSAs established for previously uninsured individuals. If the IRS determines that the number of taxpayers anticipated to have MSA contributions exceeds the applicable threshold level, the IRS is required to issue "guidance" to the public by no later than October 1.

  4. The Secretary of the Treasury can require the trustee of a medical savings accounts to make reports regarding an account to the Secretary of the Treasury and to the account holder with respect to contributions, distributions, and other matters as the Secretary of the Treasury determines appropriate. The reports required by this section shall be filed at such time and in such manner and furnished to such individuals at such time and in such manner as may be required by the Secretary of the Treasury.

  5. The Department of Treasury has told us that the Internal Revenue Service will be writing the rules covering MSA distribution. These rules will tell insurance companies how they can sell Medical Savings Account policies to the public. At this moment, the IRS is in the initial stages of selecting the team to write these rules.

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