Medical savings accounts are savings accounts used to pay for unreimbursed health care expenses. These accounts can accumulate tax-deferred interest similar to individual retirement accounts (IRAs). Authorized by Title III of the Health Insurance Portability and Accountability Act of 1996, medical savings accounts became available starting on January 1, 1997.
Funds are controlled and owned by the account holder. The employee or the employer–never both–makes contributions. In order to qualify, the employee must be covered by a high-deductible health insurance plan and must be self-employed or employed by a firm with 50 or fewer employees. For 2001, the annual deductible for qualifying high-deductible insurance was between $1,600 and $2,400 for self-only coverage; the ceiling on annual out-of-pocket expenses for covered benefits could not exceed $3,200. For family coverage, the deductible could not be less than $3,200 or more than $4,800, and the ceiling on out-of-pocket expenses could not exceed $5,850.
Savings are rolled over every year and are portable, regardless of employment status. Funds can be used on a pretax basis to pay for long-term care insurance premiums, health insurance premiums paid while unemployed, and COBRA premiums (for continuation of health insurance coverage available to formerly covered individuals under provisions of the Consolidated Omnibus Budget Reconciliation Act).
Funds can accumulate earnings, which are not taxed unless funds are withdrawn for nonmedical expenses. If withdrawn for nonmedical purposes, savings are considered taxable income and are subject to income taxes in addition to a 15-percent penalty tax. If the employee becomes disabled or reaches Medicare eligibility age, however, distributions for nonmedical expenses from the account are subject only to ordinary income tax, not the penalty tax.
The maximum contribution to a medical savings account for single coverage is 65 percent of the deductible on the employee’s health plan and 75 percent of the deductible for family coverage. For example, if an employee has a health plan with a deductible of $2,225, then he is allowed to contribute a maximum of $1,446.25 to a medical savings account for single coverage. With a family plan deductible of $4,500, a maximum contribution of $3,375 is allowed.