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Medical Savings Account
Medical Savings Accounts or MSAs offer all American workers the chance to allocate part of their income in a tax deductible account provided the funds are used to meet approved medical expenses. Congress approved this law in August 1996 through the Kassebaum Kennedy bill brought to statute by then President Bill Clinton. MSAs became available to the general public on January 1st, 1997.
Originally restricted to a maximum number of 750, 000 persons, MSAs have now become available to the public at large. The law itself was a reaction to the large cost levels to which catastrophic health insurance had risen. The MSA bill permitted individuals to set aside up to 1,400 USD of their income (or 3,375 USD in the case of families), which would be invested in a tax deductible fund that could be used to meet a range of medical expenses. Recognized expenses included acupuncture, eye glasses, psychological treatment, and a whole range of other common medical expenses.
Whenever funds were taken out of an individual’s or family’s MSA account, then the balance could be used for further medical expenses, or the funds could be withdrawn for non-medical purposes. In the latter case, a tax penalty of 15% would be levied by the government.
The main advantage of MSAs is in providing self-employed persons the same tax breaks offered to employees of companies and large corporations who have been able to take advantage of similar schemes for many years. One criticism of the scheme is that it results in wealthy persons taking funds out of the catastrophic health insurance schemes, which would in turn result in premiums in those funds to rise. However, there is no empirical evidence of this claim, and MSAs are likely to continue to attract contributors eager to take advantage of this generous tax break. Critics of the scheme should also note that MSA investors must also possess their own catastrophic health insurance before being permitted to open their own private MSA.
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