I’ve been living in a dream world. It’s one where all your medical expenses are paid, where prescription medicine costs a minimal fee, where dental coverage only runs $4 per month, where you never have to think about health insurance.
That was my situation when my late husband worked for Packard Electric, and that continued up until the time I remarried. Then reality hit with a bang!
Suddenly, I was faced with monthly insurance bills in the $300-$400 range and coverage that didn’t come close to what I had before. I wrung my hands in despair. I raged against a system that discriminates against small business. And what did my loving spouse say? Welcome to the real world!
As I have searched for answers to our health coverage dilemma, I’ve revisited a piece of legislation that created medical savings accounts. These were designed with the small business person in mind. In 1997, additional legislation gave these accounts tax deductible status. While they don’t work for everyone, this may be the answer for your family.
First, to qualify for a medical savings account, you must have a certain type of health insurance. Your insurance must be only for major medical and must have a high deductible. If your insurance covers doctor’s visits and prescription medicine, you would not qualify.
If you have a policy for your family, you can put aside money in the medical savings account to cover up to 75% of your annual deductible. If you’re single, you can put aside up to 65% of your annual deductible. With a family, a $3,000 deductible means you can put up to $2,250 into the medical savings account. The higher your deductible, the more money you can put into these accounts.
These work somewhat like a deductible IRA. Whatever money you put in is deducted from your income for that year. You are allowed to tap into the account for medical items like doctor’s visits, hospital care not covered by insurance, dental, eyeglasses, and even chiropractic care. You should check with your CPA on eligible items. Whatever you don’t use can be carried over to future years or applied to retirement, like an IRA. If you withdraw funds from the account for retirement, these withdrawals are treated the same way as an IRA.
Many banks are allowing for these accounts, and some brokerage houses even offer them. This allows you to invest the funds in something other than a passbook savings for optimum growth. Many insurance companies are offering the accounts to supplement their major medical coverage. Some accounts even have check-writing or a VISA to help you easily track the medical expenses. Pay the doctor with the medical savings account VISA, and there’s no question about the expense.
Opting for major medical, high-deductible insurance saves you premium money each month. You can use the savings to fund the medical savings account. The beauty of these accounts is that it gives you control of your expenses. Use it only when you need it. If your family stays in good health, you have extra savings for retirement.
While health insurance premiums are now deductible for the self-employed individual, the medical savings account may leave more money in your pocket. After all, the insurance companies are counting on paying out less in expenses for you than what you pay in to them. Having a major medical policy covers you for the disasters that you can’t pay for yourself. Having a medical savings account covers you for the day-to-day aches and pains and means you are paying yourself for staying healthy.
This is a huge tax break. Because of that, the IRS is limiting the number of these accounts to 750,000. This is not for everyone. Check with the institution offering the account and with your CPA to make certain it fits your needs. For those of us waking up to the real world, this may be the answer.
Nancy Lottridge Anderson, CFA, is president of New Perspectives Inc. in Clinton. Her e-mail address is NL2invest@aol.com.