Jerry Peek's MSA/HSA (Health Savings Account) Notes

(Note: at the end of 2003, the new HSA -- Health Savings Account -- has effectively replaced the MSA. It has a bigger deductible, employers can contribute for their employees, and other improvements. I'll try to update this page ASAP. For now, check for info around the Web with the Google search box below and/or see the Yahoo HSA group I mention below.)

If you live in the US and you're self-employed, like me, have you been struggling to get good health insurance coverage? You might have a group plan through an association or a former employer... but, if you're healthy, you could probably get lower rates with an individual policy. Or maybe you have an individual policy... but it has all sorts of exclusions and restrictions. And either of those plans can make you wait for weeks to see an overwhelmed HMO or PPO doctor.

In the summer of 2001, I found what looks like a great alternative for self-employed people and small businesses: an Archer MSA (Medical Savings Account). It's an insurance policy plus a tax-free savings account. MSAs were designed by the federal government. There's a lot to MSAs that wasn't obvious to me at first. It was hard to get information, and even harder to make sense of it -- to see why MSAs are so good. I'd like to spread the word, so I wrote this page.

First, a disclaimer: I am not an insurance broker, a lawyer, a tax consultant, or any kind of specialist. I'm just a self-employed writer. You should check all of this yourself. Use this information at your own risk. And, if you have any comments or suggestions about this web page, please let me know! I'll try to update this as I have time.

This page has five other sections. Read through if you want an overview and some of what I found out as I learned about MSAs. Or skip to one of the sections:
What's an MSA?
Where Do You Get an MSA?
Tips
Discussion Group about HSAs
And Finally...

What's an MSA?

An MSA has two parts:

• A health insurance policy with a high deductible (deductible is the amount you have to pay doctors and other providers, each year, before the insurance starts paying)
• A tax-free savings account, similar to an IRA, that you can use to pay the deductible on your insurance

When you need medical care, you first take money from your account. (You might not want to do this, though; see Tips below!) Once you've spent your yearly deductible, your insurance starts to pay.

MSAs are only for self-employed people and small businesses, plus those peoples' families. You can only use the money for medical expenses. But you can use any medical provider you want; you can even pay for your transportation to a facility thousands of miles away (like the Mayo Clinic). And the definition of "medical provider" is broad: it includes dentists, chiropractors, acupuncturists, and many more... all of them paid tax-free! (But see Tips, below, for the problems with this.)

I'm healthy; I exercise, don't smoke, etc... but I still was paying a lot for my group policy, an HMO. For less than the cost of my old group plan, I've now got an MSA that lets me see any doctor, including doctors who won't accept HMOs. Even better, about half of this money is building a tax-free savings account -- which I can use to pay my deductibles in future years and/or for medical services that my insurance policy doesn't allow.

MSAs are a pilot project; Congress hasn't made the program permanent and only a limited number of people can get MSAs. Once you get your MSA, though, you've got it for life. So get it!

Where Do You Get an MSA?

They can be hard to find. Some insurance companies have MSAs, but many of their agents and brokers don't seem to know much about them. (I also got some advice against MSAs that later turned out to be wrong. MSAs may not be right for everyone, though, so ask lots of questions and keep notes!) I'd suggest using someone experienced: ask how many MSAs they've written. (If they work for a small firm, do they have their own MSAs? If not, why not?) Compare their advice to what you find on the Web.

To find an MSA, I started by searching the Web using my favorite search engine, Google. (There's a filled-out search box at the end of this page.) For reasons of privacy, I'd rather not tell you what company I ended up with. But, let me tell you: there are some really small companies... as well as big ones like Fortis, Blue Cross Blue Shield, and Golden Rule. You might want to check out your company using rating services like A.M. Best and National Committee for Quality Insurance.

Theoretically, you can get the two parts (policy and account) from two different companies. Right now, that sounds like a headache to me... though I might get a different account, later, as I want to move some of my money from my FDIC-insured bank account into stocks or whatever.

Tips

1. The MSA pilot project has been renewed a couple of times, so you'll find a lot of old information on the Web. Most of it still seems to apply, though the deductibles and the amount you can contribute to your account have gone up year by year. Some useful websites are:
   • Council for Affordable Health Insurance, a lobbying group of insurance agents, doctors, etc. They have information about MSAs and a (fairly old) list of vendors.
   • Choosing and Using a Health Plan, from the US Agency for Healthcare Research and Quality, has lots of advice on finding the right plan.
   • MSAbank, who provides MSAs, has a website with lots of advice that covers more than just their plans.
   • To get more information, there's a filled-out Google search box at the end of this page.
2. If this is the first time you've gotten an individual (non-group) policy, be careful not to be rejected. Applications for individual policies aren't approved automatically, as group-policy applications often are. If your application has details that scare the insurance underwriters enough, they may reject you. And one of the questions on every insurance form I've seen is whether you've ever had an application rejected. It's a red flag; you don't want to have to explain rejections to other insurance companies!

   My insurance broker was a big help at phrasing my health details so that they were accurate but also didn't scare underwriters. Find an experienced health insurance broker! Although the insurance companies pay the broker, the broker represents you -- and wants you to get a policy, so she'll get her fee.

   (By the way, I started with the first person I found in my automobile insurance agent's office. She not only didn't know about her company's MSAs, she knew next to nothing about health insurance. The qualified broker I found later told me how close I got myself to disaster; even though I'm healthy, my application looked like a minefield.)

3. If you have serious medical problems in the first year, while your account is almost empty, you may need to find a lot of money in a hurry to pay your deductible! Either be rich ;-) or be sure your policy has a rider that covers major expenses for the first year or so.
4. If your policy comes with a PPO (a "network" of doctors you're required to use), it'll be cheaper. But that network will limit your choices, later, if you have serious medical problems. And if you want to use a non-network provider, some of their fee -- typically 25% or 50% -- won't count against your yearly deductible... so they'll cost you even more!

   If you can afford to, get the most freedom you can when you start your policy by choosing an "all doctors" policy. It'll cost you more, but what's your life worth?? You'll be able to choose the best doctors and hospitals if you ever need them. (Because the MSA has a "high-deductible" policy, the best policies may not cost as much as you think.)

5. You can spend your MSA money on any medical provider that the IRS approves. (There's a list in IRS Publication 502, Medical and Dental Expenses.) But... even though you're paying the provider from your MSA, you can only apply the provider's bill against your deductible if your insurer approves the expense! This is just like non-MSA policies, so maybe it's not worth mentioning. (At first, though, I confused the rules about what the IRS would allow me to deduct from my taxes with the rules of what the insurance company would allow me to apply to my deductible.) What the IRS allows, you can spend from your MSA if you want... but if the insurance company doesn't approve that expense, you can't apply it against your deductible.

   Let's say your policy has a $1600 deductible and, for example, that your policy doesn't cover dentists. You still can spend $1000 at your dentist from your MSA. You might think that leaves you just $600 more to spend before your policy starts to pay. That's probably wrong! If your insurance policy doesn't cover dentists, you still have to pay another $1600 for expenses that your policy does approve, before your policy will pay a dime! The next tip has a way to work around that problem.

6. A freelance writer who's had an MSA for four years gave me this advice: Use your MSA account as a rainy-day fund. Build it up as high as you can: it's a tax-free investment! Pay routine medical expenses out of your pocket, not your MSA. That might sound expensive, but he says that his providers are glad to give him a 20% or 30% discount for paying them cash on the spot: they don't have to wait months for payment from an insurance company. And he can choose any doctor, dentist, or provider: not just the ones who contract with HMOs and are overwhelmed with patients and rules.

   Later, when your account has plenty of money in it, you can easily pay your yearly deductible from the balance in your account. By then, all you'll have to pay out-of-pocket is the policy premium -- which, for a high-deductible policy like an MSA, isn't that expensive.

   This person isn't rich: he's a freelance writer! He said that having an MSA encouraged him to take care of his health and to feel responsible for himself. He found ways to live healthier and to spend less -- without skimping on good routine care like checkups. He used the money he saved to build up his MSA.

   (No, you can't pay the MSA policy premium from your MSA account! But you can still write off most of the premium on your taxes by taking the Self-Employed Health Insurance deduction on Form 1040.)

Discussion Group about HSAs

People see this web page and send me questions. I can't answer most of them; I only understand my policy in my state (Arizona). So I decided to start an online discussion group about MSAs and see if that helps. Since then (January 2004), we've changed the group name to discuss HSAs. Even if you don't want to join the group discussion, you can read the archives of both the new and old groups. The group's home page is at finance.groups.yahoo.com/group/HSA_insurance/, and there's a link from that home page to the old MSA group archives.

And Finally...

Oh, and before you go, I'll finish with my disclaimer: I am not an insurance broker, a lawyer, a tax consultant, or any kind of specialist. I'm just a self-employed writer. You should check all of this yourself. Use this information at your own risk. And, if you have any comments or suggestions about this web page, please let me know by clicking the "contact" link below.

Last change: 22 January 2004