Med Savings Accounts Find Favor

July 8, 2002
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GRAND RAPIDS — Area business advocates aren’t quite as ready as The Wall Street Journal was last week to sing the praises of the U.S. Internal Revenue Service.

But Barry Cargill, of the Michigan Small Business Administration, and John Brown, of the Grand Rapids Chamber of Commerce, admit they are impressed.

The Journal carried an editorial last week praising a joint ruling by the Treasury Department and the IRS that the mainstream media ignored.

The ruling gives the green light to something near and dear to the Journal’s editorial heart: the so-called medical savings account (MSA). The publication claims that the change will help slow the explosive growth of health-care costs.

Cargill, vice president for government relations of SBAM, said he was delighted to learn of the announcement. “Boy, that’s a great ruling,” said Cargill, vice president for government relations for SBAM. “Absolutely fantastic. I think it’s going to help businesses and workers.”

Brown, president of the chamber, said of the ruling, “It’s very welcome. What it does is offer employers and employees greater flexibility. I think it will be really beneficial.”

What the ruling does, in effect, is enable citizens to have IRA-style medical savings accounts that are tax-free as long as the funds are used for valid medical purposes. Employees can carry the accounts forward from year to year.

As the Journal’s editorial sees it, the Treasury-IRS ruling would enable employers to cut insurance costs drastically by buying high-deductible group health insurance plans.

Then — under an MSA — the employer’s savings theoretically would be great enough that they could give part of that savings to employees. The employees could apply the money, as needed, to their deductibles or to supplemental health insurance or even long-term care coverage for their old age.

The employees could take accounts with them to other employers, or into retirement or even in COBRA continuances. As long as the money would be saved or used for medical purposes, it would remain — and grow — tax-free.

Brown said he thinks the idea might soon find favor among workers because the pressure of “exponentially increasing health-care costs” and insurance premiums has begun to register with workers. So has the notion that they have to pay a larger share of their group insurance.

“For a long time,” Brown said, “the problem was that employees were ‘de-incentivized’ from thinking about the costs of health care.”

But recently, he said, he has talked to employers who have shown workers that increases in premiums alone have amounted to the equivalent of raises of 2 percent or 3 percent for the corporate work force.

“That really brought the employees into the reality of the situation,” Brown said. “Suddenly they were seeing that they were getting raises that they were never seeing because of health insurance costs.”

Four key points in the Treasury-IRS ruling are that:

  • Employees would not be taxed on their “premium savings income” so long as they either save it or spend it only for substantiated medical purposes.

  • Employees could roll the money they don’t spend into the next year, still free of tax.

  • Employees could take those savings to a new job, or into retirement or, if laid off or terminated, into a COBRA continuation. As long as the money was spent strictly for substantiated medical purposes, it would not be taxable under the new rule.

“Of course, medical savings accounts were approved by Congress and by the Michigan Legislature some years back,” Cargill said, “but then they (Congress) limited the number of firms that could use them.”

When Congress adopted its MSA statute in 1996, however, it slapped a limit of 750,000 on the number of accounts, supposedly to give time for study of the innovation.

Since then, the MSA has been discussed in technical publications within the employee benefits industry, but to most area agents it seems to be little more than a technical curiosity. Two years ago, the Journal was able to find no Grand Rapids area insurance agency that handled the program.

But as of June 26, the new Treasury-IRS ruling applies universally. Brown said he believes that when financial counselors and insurance professionals start receiving technical publications that West Michigan will see some creative thinking about how employers and employees can use the MSA rulings.

“The chamber is going to do what it can to help,” he added.

Neither he nor Cargill necessarily accepts the view of The Wall Street Journal that the MSA will slow the growth in health-care costs.

The Journal editorial argues that the explosion in health-care costs has resulted in large part from the fact that for four decades, employees’ average share of medical expenses has dropped from 50 percent to 20 percent.

“With somebody else footing the bill,” the Journal opines, “health-care consumers have had little monetary incentive to shop around for cheaper drugs and services, or to avoid seeing the doctor for a sniffle.”

But the Journal’s thought is that people paying their own deductibles from their own accounts will be much more discriminating in their spending — especially since they can conserve for future years’ expenses those funds that they don’t spend this year.

Brown said he doesn’t regard the MSA as a panacea. “It’s one important step,” he said. “But only one.”

Cargill confined himself to saying, “It really sounds like a viable alternative. But it’s just the tip of the iceberg of the things we need to do,” he added.

“It’s amazing that the federal government subsidizes health care for corporations but taxes small businesses’ health insurance premiums.” He explained that proprietorships and the self-employed still are taxed on 60 percent of what they spend for health insurance.

In Treasury-IRS parlance, the MSA actually would be described as something called an employer-employee Health Reimbursement Arrangement (HRA) that would have a tax-free savings employee account component.

The ruling specifies that an employer could not set up an HRA in any group insurance plan that is paid in part by a Section 125 salary reduction plan.

What the measure would do, in the words of Treasury Secretary Paul O’Neill, is to “clear the way for employers to adopt health plans with patient-directed features so that employees have more choice and greater control over their health -care coverage.”           

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