NCPA - National Center for Policy Analysis

Flexible MSAs

April 20, 2001

With only a small change in federal law, the accounts many employees use to pay medical costs not covered by their health plan could be turned into Medical Savings Accounts (MSAs), says John C. Goodman, president of the National Center for Policy Analysis. The change would give many more people access to MSAs.

Medical Savings Accounts (MSAs) allow individuals to own and control some of their own health care dollars. Instead of turning all the money over to an employer or insurance company, part of the funds are placed in an account from which patients pay directly for medical services or to meet insurance deductibles and copayments.

Since individuals get to keep any MSA funds they do not spend, they have an incentive to control costs. Unfortunately, eligibility for tax-free MSAs is severely restricted. Thus, only 100,000 households have MSAs under a federal pilot program (see figure).

Many more employees have Flexible Spending Accounts (FSAs), voluntary accounts funded by monthly, pretax payroll deductions -- the level of which is chosen by the individual employee. However, any money left in the FSA at year-end is forfeited. So instead of encouraging people to spend prudently, FSAs encourage people to spend money left over at the end of the year on more expensive eyeglasses, diagnostic tests and so forth.

More than 200 times as many people have FSAs as MSAs. But if employees were allowed to roll over FSA balances from year to year tax free, and move unused deposits into savings, FSAs would in effect be turned into Flexible MSAs.

This new option would solve several problems, because the accounts would belong to the individual rather than the employer, and would move with the employee from job to job.

Source: John C. Goodman (president, National Center for Policy Analysis), "MSAs for Everyone, Part III," Brief Analysis No. 356, April 19, 2001, NCPA.

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