Posted on 12/04/2001 1:08:14 PM PST by grist for the mill
Now the self-employed have the option of using pre-tax money to pay for contact lenses and root canals just like their friends who work for corporations.
Recognize yourself in this picture?
You left your corporate job to set up your own shop a couple of years ago and spent the first 18 months fretting that you wouldn't be able to pay the bills. The good news is that the money started rolling in. The bad news is that you've been using a big chunk of it to replace the benefits package you left behind.
Finding -- and paying for -- benefits, particularly medical insurance, is the dark side of most successful one-person businesses, mine included. Many people "go bare," as they say in the insurance industry, taking their chances with no coverage at all. Others opt for the highest deductible health care policy they can find, reasoning that it will cover them in a catastrophe. If you are among them, you should be looking carefully at the medical savings account, a new tax-advantaged health insurance program for self-employed individuals and workers at businesses with 50 or fewer employees.
How they work
Congress approved medical savings accounts, combined with a high-deductible insurance policy, in 1997. Here's how they work: You get a tax deduction for money contributed to the account each year. Then you pay your medical expenses by withdrawing funds from the account. If expenses exceed your insurance policy's deductible amount, the policy kicks in and pays the additional costs. If you spend less than the amount you contributed, the difference stays in the account and earns interest.
"For the self-employed business person, this is the best chance you've had in a long time to take care of yourself," says Lee Tooman, assistant vice president of Golden Rule Insurance Co. in Lawrenceville, Ill.
Misunderstood and unwanted
Richard Stover, a health care actuary with Buck Consultants in New York, says taxpayers have not been opening them as quickly as expected. “There's no incentive for a broker to sell them," Stover says, "and many people still don't understand how they work."
Since brokers have little incentive to sell them, it’s also difficult to find MSAs in every state.
Big businesses have been using flexible spending accounts -- or FSAs -- for years. But they have not been available to the self-employed. And the new medical savings accounts have a compelling advantage: The money is allowed to roll over and build up in the account if you don't spend it. That offer doesn't exist in FSA's. And rather than lying dormant in low interest-bearing savings accounts, you can invest it in mutual funds, stocks or other investment vehicles that typically offer much higher returns over the long run. Whatever you don't spend can be used to supplement retirement income. In contrast, the flexible spending accounts offered by large employers have a "use-it-or-lose-it" provision. Whatever is not used by the end of the year is lost to you.
Rules and limits
The government set some rules for the MSA accounts. There is a range for the deductible on the insurance policies: $1,500 to $2,250 a year for an individual; $3,000 to $4,500 a year for a family. Above that amount, the insurance program might cover 100% of expenses. Or it can provide for some type of co-payment by participants, say 20% of all covered expenses in excess of the deductible. The government also set limits on total out-of-pocket medical expenses (deductibles plus co-payments) with a maximum of $3,000 for a single person and $5,500 for a family.
The employee -- or the employer -- can make pre-tax contributions that can total 65% of the deductible for an individual, 75% for a family. So if you buy a single policy with a deductible of $1,500, you can contribute $975 (65% of that amount) to a medical savings account. The money can be used to pay those medical expenses you incur before you reach the deductible as well as other eligible costs like eyeglasses and dental care.
If you spend the entire $975, you have to pay after-tax dollars for medical expenses until you hit the deductible. If you spend less, the money builds up in your account. You roll it over at the end of the year and you can make another contribution next year.
You must pay tax and a 15% penalty on money that is withdrawn from your account for any use other than medical expenses before age 65. After age 65, withdrawals for non-medical purposes are still taxable but no penalty applies. An analysis in the June issue of the Journal of Financial Planning concluded that such accounts could be used to accumulate a nice retirement nest egg. A person who puts in about $1,500 a year for 25 years could make almost $1.5 million, assuming a 12% annual rate of return.
Of course, few people will sail through 40 years without spending any money on health care.
But these accounts offer a good deal on the health-care side of the equation, too. I've often wondered why those of us who are self-employed didn't have the option of using pre-tax money to pay for contact lenses and root canals like our friends who work for corporations. Now we do.
Diffuculty number one is that the commissions earned on the health plans are significantly lower than on PPO or HMO plans. (This tells you something right off the bat), but the practical upshot is that brokers make it VERY difficult to get information, find the best plans etc. You have to do the research yourself, which takes time away from the basics (like, say, running your business.)
Difficulty No. 2, that I've encountered, is in explaining the concept to one's employees. I've got a solid group of people, but the notion of having to take responsibility for one's medical planning is especially troubling for the younger (generation x and y) types. Of course, this could be resolved by Diktat, but that's not always the best way to manage one's employees, especially in a professional service type business -- like law, engineering or architecture.
Difficulty No. 3, and the only real impediment, is the pre-existing condition problem. Individual plans are still largely governed by the free market -- insurers are not obliged to provide coverage if they think that you're too big a risk. With a group plan, at least in California, the market has been subverted such that they can't refuse coverage to an individual and still cover the group. This explains, in part, the higher cost of group plans, but does solve the difficult problem of an individual with a pre-existing condition.
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FRegards
Absalom
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Employee's actually managing their health issues is another big problem, but as stated in the article, what a great deal for younger workers that manage to stay healthy over time.
I'm in the initial stages of working through the issues and when I find out more I'll post it here. I'm from LA and in the process of moving to Arizona, so I know what you are up against in California. Although, health insurance premiums (in some cases) are actually more in Arizona, versus California, especially in the rural areas!
We have a small group of 10 employees and family coverage is $1,284.10 per month (PPO). Naturally, we are looking at HMO's (limited coverage in our (rural) area) and MSA accounts.
The cost of the MSA insurance program on a monthly basis is the big issue and it's not an easy task to get sufficient information to make a decision - as stated in this thread: when the commission is low, agents sell other products.
An additional factor is the cost of prescription drugs under an MSA program. Maintenance type drugs can be secured through Canadian sources on the web for a lot less than in the US, so for anyone that is "maintaining" their health, the Canadian source for drugs should be considered to reduce the hit on MSA account. Of course, the goal is to end up with funds in the MSA account each year and if you work on it there can be a huge payoff for that effort.
I have done some searching for cheap perscription sites, but all I got on Google was sites for Viagra! I don't think my daughter (or I) need that.
I'll put a pin in this and, like you, post any better information that I uncover. This seems like a very promising way to provide a good level of health benefits to my employees, while allowing people to taylor the coverage for their particular situation.
FRegards!
http://www.lipitor-online-pharmacy.com/
Lipitor being a drug that I'm interested in, but this on-line entity apparently has other sites covering other drugs, such as:
Propecia Xenical Allegra Didrex Phentermine Adipex Meridia LipitorClaritin Paxil Zoloft Prozac Pravachol Vaniqa Vioxx Zyrtec HGH Herbal Supplements
I friend of mine is on Paxil and the cost of Paxil in the US is around $200 for a 30 day supply, but only $159.80 for 100 tabs (over three months supply), so those numbers got me to thinking that I should check out my maintenance drugs. There is a small cost ($6.40) to have a Canadian Physician review the prescription, $6.40 to the Pharmacy to dispense and a shipping fee, but what a deal! I've seen people on TV going up to Canada on a bus to save money on drugs, but if they can be delivered, that's my kind of deal!
I'm hoping that this URL can either assist you or direct you to someone that can. It is interesting that with all the information that is on the net, there is a lack of direct access to this issue that impacts all of us more and more each day.
By the way, check out:
http://www.cbpp.org/4-24-01tax2.htm
It's an article against continuing and expanding MSA's, but provides some detail as to what the Bush team is trying to accomplish in the next phase.
It states, in part:
Nevertheless, MSAs could be used by high-income taxpayers as a means to circumvent the income limits that currently govern tax-advantaged deposits to Individual Retirement Accounts. Under the proposed MSA expansion, anyone may participate in MSAs and may make deductible contributions equal to 100 percent of the health insurance high deductible (current law permits only 65 percent for individual taxpayers and 75 percent for married taxpayers). As a result, all high-income taxpayers who choose to use MSAs would be allowed to make tax deductible deposits up to $2,350 for individuals and $4,650 for couples (the maximum high deductibles permitted), and the earnings on these MSA deposits would compound free of tax. Like funds deposited in an IRA, funds on deposit in an MSA may be invested in stocks, bonds, or similar types of assets. MSA deposits and earnings are never taxed if MSA funds are used to pay medical costs. Moreover, the tax advantages of MSAs can be substantial even if the funds in the accounts are later withdrawn and used primarily or exclusively for non-medical purposes. If deposits are held until retirement age, for example, there is no penalty for withdrawal for non-medical purposes. Even if funds are withdrawn for non-medical purposes before retirement age, there are a number of circumstances under which the value of the tax-free compounding of the deposits over a number of years would outweigh the penalty that must be paid for a non-medical withdrawal.
Although this is a negative view, turn it around to positive and it's one heck of a plan from a health maintenance, savings, and retirement point of view with access by anyone that is willing to fully participate in maintaining their health, regardless of income. And, yes, healthy people will be (generally) the one's that will maintain an MSA - it is nice (and proper) to have a plan that rewards the efforts of whose who actively participate in health maintenance.
After my earlier posting, I tried another search (including "Canadian") and came up with www.thecanadiandrugstore.com. Looks good. A 50 day supply of my daughter's medication costs $142 (US). My local pharmacy charges me over $500.
BTW, when I lived in Europe (Denmark and UK) the medication was "free" (Paid out of the the heavy taxes) or very cheap. Although I am a dedicated capitalist, it made me see the attraction of socialism. To be clear, I never want to see Euro-style socialism or Canadian health care in the USA.
If you have interest in MSA's an excellent site is:
http://cahi.org/msaresources.htm
It's a organization that provides information on MSA's. From this URL you can go to a list of MSA administrators and MSA Insurance Companies with the states that are covered noted by the name of each.
I completely agree that probably none of us want UK or Canadian socialism in American, but what all of us want is the best shot at a plan, like MSA's, that directly provide incentives to stay in good health and to keep more of our hard earned money and to assist employees of small firms to do the same. The one size fits all HMO's, where healthy people pay the cost, through higher premiums, for others that do not take care of themselves gets old. MSA's really get health care down to the individual decision level, providing risk management and at least an opportunity to save dollars over time as a reward for good practices, healthwise. Unfortunately, Indemnity plans, PPO's and HMO's do not provide incentives, just increasing premiums each year, for various reasons, including a generally decreasing level of health for entire groups of people with a person in good health along for the ride.
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