Effective January 1, 2004 200+ million non-elderly Americans have access to a Medical Savings Account, and one that is far more attractive than the Archer MSAs that were enacted in 1996.

Account holders must have a qualified insurance plan, but the insurance requirements have been opened up considerably. Allowable deductibles were lowered to an annually indexed, $1,000 for an individual and $2,000 for a family. The maximum deductible requirement has been replaced by maximum out-of-pocket limits of $5,000 for individuals and $10,000 for families. These limits include deductibles and coinsurance for "in-network" providers. These amounts will be adjusted annually for cost of living increases. There is no restriction on the stop-loss limits for out-of-network services. ( see current IRS limits )

Preventive care services may be covered on a first-dollar basis. That is, deductibles will not have to apply to services as defined by section 1871 of the Social Security Act.

SEE HSA annual contribution limits by clicking here

Such contributions may be made by any combination of employer and individual. Employer contributions are excludable from income and individual contributions are deductible "above the line." That is, a taxpayer does not have to itemize deductions in order to take the contribution as a deduction. Employers may offer HSAs as part of a section 125(d) cafeteria plan.

Funds in an HSA may be invested as the account holder sees fit (CDs, money market funds, mutual funds, etc.) except they may not be invested in life insurance contracts. Earnings on the accounts build-up free of taxes. The funds will be held in a trust administered by a bank, insurance company, or other approved administrator.

Funds may be withdrawn tax-free to pay for qualified medical expenses, which include all section 213(d) expenses, except health insurance premium payments. HSA funds may be used to pay premiums only for long-term care insurance, COBRA continuation premiums, or other health insurance premiums for people receiving unemployment benefits.

Funds withdrawn for non-medical purposes will be included in the account holder's gross income and taxed accordingly. A penalty of 10% will also be applied except in cases of death, disability, or Medicare eligibility. In the case of death or divorce, the account may be transferred to a spouse without incurring taxes. If someone other than a spouse is the beneficiary, the funds will be treated as taxable income.

Market Analysis

While it is always hard to predict how markets will react to any change in conditions, we can reasonably expect the following developments:

§ There will be a rush of banks, insurance companies and third-party administrators (TPAs) to develop products. The previous restrictions on Archer MSAs have been removed. There is no longer a sunset provision, there is no limit on employer size or total enrollment. Companies were reluctant to invest much development effort in a product that was so tentative. But now there is a far greater assurance that such efforts have a chance to succeed.

§ All these development efforts will lead to far greater public awareness of the product. In the past, there were so few vendors that MSAs remained almost a secret, of no consequence at all to anyone who wasn't self-employed or the owner of a small business. Now there will be a critical mass of publicity and promotion that will break through the fog.

§ The individual market will convert to HSA in droves. It is hard to imagine very many individual purchasers who would not prefer an HSA over anything else on the market. Individual buyers still will get not tax break on their premium payments, but their HSA contributions will be 100% deductible. They will have a strong incentive to minimize their premium payment and maximize their HSA contribution. Plus, the lower allowable deductible removes a major hurdle. A large number of individual policies already have deductibles of $1,000.

§ The small group market will be slower. Small employers are not benefits innovators. They don't have the time to think much about benefit options. They have had the MSA option available for several years and haven't paid much attention to it. Small employers were very slow to move to managed care, and they are well behind the rest of the market today in increasing employee cost-sharing. They have been more likely to simply not cover dependents at all, and HSAs don't offer much help in that area.

§ The fully-insured mid-market is a different story. Companies with 100 to 1,000 employees are more likely to have staff that concentrates on benefits options and has the time to investigate new products. They are also able to keep the conversion cost-neutral - raising deductibles means lowering premiums. The premium savings can be contributed to the HSA, to be supplemented with a worker's own tax-deductible contribution. These companies have been raising cost-sharing requirements anyway, so the prospect of an employee responsibility for funding part of the HSA is less of a stretch in this segment.

§ Self-insured large companies will likely stay with Health Reimbursement Arrangements (HRAs). Companies that pay directly for the services consumed are unlikely to be attracted to HSAs, which expect an up-front contribution of money for all employees whether they are using services or not. HRAs have the considerable advantage of not requiring pre-funding. Money is paid out only when a service is incurred, exactly as if the worker were covered by the health plan. On the other hand, the presence of HSAs in the market will put some pressure on HRA employers to allow greater portability of HRA funds. It will be harder to deny employees access to that money when other companies are offering full ownership of an HSA account.

§ The uninsured should find it easier to gain coverage. Medical Savings Accounts have already proven their popularity with the uninsured. The IRS reports that 73% of new MSA accounts are set up by people who had been uninsured for six months or more. But MSAs are available only to the self-employed or employees whose employers set up the program. HSAs will be available to everybody - especially those workers whose employers provide no coverage at all, and who make up the vast majority of the uninsured. Plus, as HSAs gain market share, more and more workers will have a source of funds to pay for coverage when they are laid-off or otherwise lose their jobs. HSAs should have a profound effect on the short-term uninsured.

Call Castle Group Health Inc., toll free @ 877-559-8100 to see if an HSA is right for you.