State lawmaker proposes bill to create medical IRAs
A bill to be introduced to the State Assembly by an Appleton legislator would create a new type of medical savings account that some say would sidestep many of the problems that hamstring traditional MSAs.
MSAs are tax-sheltered savings accounts earmarked for medical expenses. Deposits are 100% tax-deductible for the self-employed and can be withdrawn by check or debit card to pay for medical expenses.
Rep. Steve Weickert (R-Appleton) plans to introduce a bill to allow the creation of medical individual retirement accounts (IRAs).
Unlike a flexible spending account, unused funds contributed each year to a medical IRA would be retained and earn interest on a tax-favored basis to supplement retirement.
The medical IRA is similar to an MSA in that consumers benefit by controlling their health care costs because they retain unspent funds.
"What this bill addresses is personal accountability," Weickert said, adding that he hoped his initiative would make self-funded health savings vehicles more feasible for more people.
According to the Legislative Fiscal Bureau, the proposed legislation to create medical IRAs would mean individuals "may establish an individual medical account for the person, his or her spouse and his or her dependents (beneficiaries)."
The accounts, the fiscal bureau says, may be used to pay for medical care expenses and long-term care expenses for the beneficiaries. The long-term care that would be covered would include in-home, community-based or institutional care for chronic or terminal illness.
The legislation would provide for tax-deductible contributions of $2,000 each for the account holder and a spouse, and contributions of up to $1,000 for each dependent.
Interest paid on the accounts is tax-exempt, according to the bureau. However, withdrawals for non-medical-related expenses would result in a penalty equal to about 10% of accrued interest and 10% of the amount withdrawn.
The bill would impose a limit of 10,000 accounts created in the state without further legislative changes.
The savings vehicle proposed by Weickert would differ from a traditional MSA in a variety of ways, according to Terry Frett, president of Waukesha-based benefits consultancy Frett/Barrington Limited.
"One aspect that I like is that they don’t complicate what your underlying health program has to be," Frett said. "I believe one reason MSAs are not popular is that the IRS determines your underlying health insurance plan to establish your account."
The savings vehicle proposed by Weickert also would allow employees and employers to contribute jointly to an account. The existing law for MSAs requires that either an employee or employer contribute, but bars a joint arrangement.
Because the yet-to-be-numbered bill is to be introduced on the state rather than the federal level, once it is passed, contributions to the medical IRAs would be deductible only on state taxes.
However, Frett and Weickert believe some of the accounts will still be opened.
"Wisconsin’s tax levels are some of the higher ones," Frett said. "So there is still the motivation to write them even if it is just state tax deductible to start with."
If medical IRAs become popular in Wisconsin, they could influence federal legislation, according to Frett.
"Most of these initiatives tend to start on a state level," Frett said. "COBRA, the federal continuation of insurance law, was really modeled after Wisconsin’s state continuation law long before there was COBRA on the federal level."
"My thought and hope is that when we try this in Wisconsin, it will work quite well," Weickert said. "Hopefully this idea will work quite well and get the attention of the people in Washington."
June 27, 2003 Small Business Times, Milwaukee
