Medical Savings Account Qualification [Clarification].

[D. Stussy]

I just want to make certain that I'm reading the rules
correctly. None of my clients nor I currently have an MSA
(formerly called an Archer-MSA).

1) There seems to be an UPPER limit on how high the "high
deductible" plan can set its deductible. The IRS
Publication seemed to say that for a "self-only" plan, the
"high deductible" cannot exceed $2,500. Therefore, someone
who has a self-only, $5k/yr deductible does not qualify to
contribute; correct?

2) Exactly what does it mean for a self-employed person to
have "established his plan under his business?" Does that
mean that it must be in the name of the business, not the
name of the sole-proprietor, and automatically cease if the
business terminates? The IRS publication didn't define
this. The plans that I see in my area (my own included) are
established in the person's own name and would continue [as
long as premiums are paid] even if the person were to become
unemployed (or change to a different SE business activity).

3) Unlike other tax-deferred plans, it looks as if there is
no way to make a "non-deductible" contribution to an MSA;
correct?

In this election year, it seems very obnoxious for the
Government to have such restrictions. Both candidates for
president, and here in CA, the senator up for re-election,
are talking about expanding health care.... I just want to
make certain that my understanding of this is correct before
I write a letter to my "congresscritter" bitching about
these restrictions and to ask that they be changed.

 

[JanZtax]

I just want to make certain that I'm reading the rules

correctly. None of my clients nor I currently have an MSA
(formerly called an Archer-MSA).

There is no reason to have an MSA; the new Health Savings
Account (HSA) is much more beneficial. Those who have an MSA
should roll it over to a HSA.

1) There seems to be an UPPER limit on how high the "high
deductible" plan can set its deductible. The IRS Publication
seemed to say that for a "self-only" plan, the "high
deductible" cannot exceed $2,500. Therefore, someone who has
a self-only, $5k/yr deductible does not qualify to contribute;
correct?

This is true. However, not all high deductible plans are
eligible HSA plans; the taxpayer should check with his/her
health insurance company.

3) Unlike other tax-deferred plans, it looks as if there
is no way to make a "non-deductible" contribution to an MSA;
correct?

No, this is not correct. The MSA contribution is limited to,
I believe 60% of the deductible. The HSA allows 100% of the
deductible or $2400, whichever is less. For those over 50,
an extra $500 is allowed. This is all deductible, rolls over
to the next year if not spent, and is never taxable if spent
on qualified medical expenses.

I'm a big proponent of these plans (HSAs). At first I
thought they were only valuable for someone with few medical
expenses who wanted catastophic coverage. But, after running
the numbers, I discovered they can be equally valuable for
someone whose medical expenses will always exceed the
deductible. For example, my HSA deductible is $1850, then my
insurance policy kicks in. My premiums were literally cut in
1/2 when I opened my HSA. Plus, I get to deduct my "savings
plan" contribution of $1850 + $500. Plus, I can use the
account to pay for things like chiropractic care that my old
insurance plan didn't cover. What's not to like?

Jan Zobel EA

 

[Jay]

I'm a big proponent of these plans (HSAs).

... What's not to like?

The administrative rigmarole is what's not to like.

In the olden days, medical expenses were deductible starting
with the first dollar. But now we can only deduct what's
over 7.5% of AGI.

To give us a health benefit, Congress could've just removed
the 7.5% floor. But no-o-o-o, they had to concoct a lot of
complicated HSA nonsense to get (what seems to me to be)
pretty much the same result. The amount we can contribute to
an HSA is too small to play a major role in long-term
financial planning, IMO. (Look at the price of a dental
crown lately? A nice pair of glasses?)

Then again I have an HSA, and had an MSA before that. Maybe
I'm a glutton for paperwork... I just love reading those IRS
pubs.

 

[D. Stussy]

I just want to make certain that I'm reading the rules

There is no reason to have an MSA; the new Health Savings
Account (HSA) is much more beneficial. Those who have an MSA
should roll it over to a HSA.

The IRS publications that deal with medical expenses and the
MSAs have not been updated to reflect HSAs; at least, not
that I could find, and I downloaded fresh .pdf copies of
"the usual suspects" last week before I posted my question.

Thanks for the reply....

This is true. However, not all high deductible plans are
eligible HSA plans; the taxpayer should check with his/her
health insurance company.

In two words: That sucks. :-(

No, this is not correct. The MSA contribution is limited to,
I believe 60% of the deductible. The HSA allows 100% of the
deductible or $2400, whichever is less. For those over 50,
an extra $500 is allowed. This is all deductible, rolls over
to the next year if not spent, and is never taxable if spent
on qualified medical expenses.

I think that you confused deductible (noun) for the purposes
of insurance with deductible (adjective) for tax purposes.
Do I need to restate my question?

 

[Tom Healy]

I'm a big proponent of these plans (HSAs). At first I

thought they were only valuable for someone with few medical
expenses who wanted catastophic coverage. But, after running
the numbers, I discovered they can be equally valuable for
someone whose medical expenses will always exceed the
deductible. For example, my HSA deductible is $1850, then my
insurance policy kicks in. My premiums were literally cut in
1/2 when I opened my HSA. Plus, I get to deduct my "savings
plan" contribution of $1850 + $500. Plus, I can use the
account to pay for things like chiropractic care that my old
insurance plan didn't cover. What's not to like?

I agree. It also is about the only way for S corporation
owners to get a deductible medical reimbursement plan. I'm
going to try to switch for next year.

--
Thomas E Healy, CPA, PC
1650 38th St., Ste 202W
Boulder, CO 80301
Please send email to: (e-mail address removed), since I block all email at my
newsgroup address.
phone (303) 443-1804
fax (720) 489-3772

 

[Michael Siemon]

I'm a big proponent of these plans (HSAs).

The administrative rigmarole is what's not to like.

In the olden days, medical expenses were deductible starting
with the first dollar. But now we can only deduct what's
over 7.5% of AGI.

To give us a health benefit, Congress could've just removed
the 7.5% floor. But no-o-o-o, they had to concoct a lot of
complicated HSA nonsense to get (what seems to me to be)
pretty much the same result. The amount we can contribute to
an HSA is too small to play a major role in long-term
financial planning, IMO. (Look at the price of a dental
crown lately? A nice pair of glasses?)

Then again I have an HSA, and had an MSA before that. Maybe
I'm a glutton for paperwork... I just love reading those IRS
pubs.

An HSA makes sense if:

a) you have a _really_ large deductible in your insurance,
and no other expected medical expenses (such as co-pays, and
the dread 20% hits when the insurance covers 80% of your
expenses up to a max out-of-pocket, as is common).

and/or

b) you can reasonably expect to have little or no medical
expenses for some years to come.

With such a situation, pre-tax savings and growth can be a
substantial aid in later medical expenses (which are pretty
much bound to come).

If you are likely to spend more than your deductible in any
current year, the HSA is of little use -- it basically just
covers your deductible for you out of pre-tax dollars. In my
case, my RX needs would blow the deductible without any
other expenses within the first five months or so of the
year. And I will have other expenses. If I had many years of
prior HSA accumulation to draw on, this would be great; but
of course no one now has such prior HSA savings.

Furthermore, I am faced with restrictions on funding a
medical FSA plan if I _do_ take out an HSA: the FSA can't be
used for _any_ expenses (deductibles, out-of-pockets,
copays, ...) incurred under the health insurance. But if I
don't take out an HSA, the FSA can be funded at a level
which _will_ cover (which the HSA will not) my expected
medical expenses for the year.

The wonderfully cynical thing is that, touting the HSA,
my only available health insurance has for next year:

* upped the deductible 47%, to qualify for HSA coverage
(but just barely)
* upped max. out-of-pocket by the same percentage (why?)
* charges all prescriptions at retail _until_ the deductible
is met (when the co-pay cuts in; previously, all RX were
bought with co-pay). Previously, I would be out of pocket
by only a bit more than the deductible over the full course
of the year for prescriptions, plus an annual physical.

I'm sure the insurance companies _love_ this measure. I don't.

 

[JanZtax]

If you are likely to spend more than your deductible in any

current year, the HSA is of little use -- it basically just
covers your deductible for you out of pre-tax dollars. In
my case, my RX needs would blow the deductible without any
other expenses within the first five months or so of the year.
And I will have other expenses.

I don't agree with you that HSAs are only for people with
few medical costs, having run the numbers on my own
situation and finding it was a no-brainer. I'm in the same
situation as you -- my Rx will exceed the deductible amount
within a few months. But then the insurance kicks in with a
20/80 coverage until I've paid about $1500 more and then it
covers at 100%. So, I pay the deductible $1850, get to put
that same amount (+$500) in a tax DEDUCTIBLE and non-taxable
account, I pay another $1500 in expenses throughout the
year, and then I have 100% insurance coverage. In return, my
monthly insurance premium decreased from $750 to $375. Works
for me.

Jan Zobel EA