MSAs – legally speaking

Medical savings accounts (MSAs) were first proposed in the Balanced Budget Act of 1995, which was vetoed by President Bill Clinton due to unrelated provisions in the bill. In a remarkable bi-partisan effort, the Health Insurance Portability and Accountability Act (HIPAA) of 1996, also known as the Kennedy-Kassebaum Bill, passed and was signed by Clinton on Aug. 21, 1996.
The bill dealt with three issues: health insurance portability, mental health coverage and length of hospital maternity stays.
The bill impacts several parts of the federal code, including the Employee Retirement Income Security Act (ERISA), the Consolidated Omnibus Budget Reconciliation Act (COBRA) and the Internal Revenue Code.
Under the Kennedy-Kassebaum bill, provisions for MSAs were part of a pilot project. Participation was restricted to companies with 50 or fewer employees and self-employed individuals. Lawmakers, afraid that large numbers of companies and individuals would be attracted to these practical insurance policies, also limited the number of policies that could be written to 750,000.
People covered by an MSA essentially get “catastrophic” insurance policies, and can make tax-deductible contributions to a designated account.
Annually, individuals can deposit in their MSAs up to 65% of the their policies’ deductible amounts for individual coverage and 75% of the deductible amounts for family coverage. Funds withdrawn from MSAs are not taxable if used for medical expenses, but can’t be used to pay for health-insurance premiums.
The funds can be withdrawn and used for non-health-care purposes, but at that point become taxable income during the year withdrawn.
MSA rules became effective in January of 1997, and were scheduled to sunset Oct. 1, 1999.
However, according to the Internal Revenue Service (IRS) Announcement 99-95, the IRS determined that the number of MSA returns to be filed for 1999 is 44,784. Therefore, 1999 was not a cut-off year for the program.
Meanwhile, both the Senate and the House of Representatives were working on their own bills to prolong the life of the MSA program.
On Oct. 6, 1999, the House passed the Quality Care for the Uninsured Act of 1999, which would remove limitations on the number of MSAs and the size of employers eligible for the program. Provisions are also included to increase the deduction allowable for contributions to MSAs. The bill was introduced to the Senate.
Meanwhile, in June of 1999, the Health Care Access and Equity Act of 1999 was introduced in the Senate. The bill would amend IRS code to increase the accessibility to and affordability of health care, and for other purposes.
“The Quality Care for the Uninsured bill – also known as the Patient Bill of Rights — died in conference in Senate. Since the 106th Congress is over, all legislation in the 106th Congress is over as well,” said Jessica Catlin, Sen. Herb Kohl’s deputy press secretary. “Health Care Access and Equity Act, which originated in the Senate, ended in committee. This year there are already a few proposals introduced regarding medical savings accounts. It’s premature to say how they will do, because they have just been introduced.”
Most notable is a bill introduced in the Senate by Sen. John McCain (R-Arizona) on Feb. 7 which is designed to expand medical coverage options for individuals.
In the House of Representatives MSA-related action has been hot and heavy in the 107th Congress. Already, a bill introduced Jan. 3 by Rep. Edward Royce (R-California) would allow up to $3,000 of unused benefits from a cafeteria plan or flexible spending account to be rolled over as nontaxable income into an MSA.
A bill introduced Feb. 8 by Rep. Greg Ganske (R-Iowa) would extend and expand provisions of the MSA program, and allow the deduction of 100% of the health-insurance costs of the self-employed, and provide a tax credit for the health insurance expenses of small businesses.
If recently-introduced bills eventually make it to the Oval Office, it looks as though MSAs will be around for a while.
Reporting your MSA activity to the IRS
For tax purposes, an MSA works a lot like a Roth IRA. According to IRS advisories:
The information reporting required for MSAs is similar to information reporting for IRAs. The notice states that the IRS will release forms and instructions to report MSA contributions, distributions, and deductions.
The annual contribution limit to an MSA is applied to each account on a pro-rated monthly basis depending on an individual’s eligibility for the MSA as of the first day of each month. Contributions, however, may be made in one or more payments at the convenience of the individual or employer at any time during a particular tax year, but no later than the time prescribed for filing the individual’s tax return for that year.
Excess contributions to an MSA are included in income and subject to a six-percent excise tax, unless corrected in a timely fashion.
If used for medical expenses, distributions from an MSA are excludable from an individual’s gross income. Distributions for other purposes, however, are included in income and subject to a 15 percent excise tax unless the distribution is made after the individual is age 65, becomes disabled, or dies.
Individual account holders, and not the trustee or custodian, are responsible for determining whether a distribution is for medical expenses.
April 13, 2001 SBT