April 10, 2000 (Texarkana, Texas) -- Until recently, the federal government gave self-employed taxpayers very little financial support toward the purchase of health insurance. In 1996, they could take a deduction on their federal taxes for only 30% of their premium payments. But a pilot program that runs until January 1, 2001, now allows them to make contributions in pretax dollars to a savings account for the payment of medical expenses. Furthermore, earnings on these contributions accumulate free of taxes.

The MSA program requires that participants be covered by a catastrophic health insurance policy with a high deductible. This deductible was originally set at between $1,550 and $2,300 for individuals and $3,000 to $4,600 for family coverage, with indexing for inflation. Once the policy is in place, individuals can contribute up to 65%, and families 75%, of this deductible to their medical savings accounts. Thus, the maximum contribution would be $1,008 to $1,495 for individual coverage and $2,288 to $3,450 for family coverage.

In essence, having an MSA gives you a pay raise because the tax-free contributions to the MSA plus the premiums for the catastrophic care together usually end up consuming a smaller proportion of gross income than premiums for traditional insurance.

Here are the details:

• The savings account is used to pay for routine, qualified medical care including eyeglasses, dental visits, and preventive care. If all the money in the account is spent, the insured pays the remaining amount of the deductible out-of-pocket until it is met. Thereafter, the catastrophic insurance policy pays 100% of covered expenses.
• Withdrawals for qualified medical expenses are tax-free. Withdrawals for some other purpose -- to pay for a car, for instance -- are subject to income tax and, if they occur before age 65, to a 15% penalty.
• Unspent funds are rolled over at year-end and remain in the account to be augmented by another contribution the following year.
• More than 50 insurers, some in affiliation with banks, now offer high-deductible policies for use with medical savings accounts.
• Unfortunately, only 28 states currently allow taxpayers to set up medical savings accounts (see list below). Get in touch with your state insurance department if yours is not listed to find out if plans are in the works to participate.
• As this is a pilot program, these plans may not be around forever -- so act soon to take advantage of this opportunity.
• The younger you are, the greater your advantage. Higher deductible plans are cheaper, and because you are less likely to need medical care, any extra money left in your account will roll forward to the next year with interest. That's the magic of this plan: you earn money if you don't use it.
• Medical savings accounts are beneficial even if you have a major medical condition or chronic illness. Simply use the MSA money (and any remainder, if necessary, out of pocket) to pay the deductible and the insurance takes care of the rest, as it would in any other situation.

States that allow medical savings accounts:

Patrick McCoy is president of the McCoy Financial Group Inc., an investment, insurance, and financial planning firm based in Texarkana, Texas.
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