Gunther Gunderson had doubled the sales staff in his ski shop. Heidi Svenson, the shop's thermal underwear buyer, suggested that Gunderson might save money and take charge of his employees' medical insurance coverage by opening a Medical Savings Account (MSA). Gunderson was skeptical until Svenson showed him Section 105 (h) of the Internal Revenue code which allows employers to start MSAs for their employees' welfare.
Svenson believed that her coworkers would support an MSA, too, because it won't provide Gunderson or other executives in the company with any more benefits than a regular employee, nor would it reduce the employees' earnings. Gunderson was so impressed by Svenson's idea, he asked her to organize and run the new MSA.
Here's how an MSA works: If adopted, Gunderson pays the same number of dollars into the plan for each employee. While the employee cannot withdraw any funds from the MSA, Gunderson may pay medical bills for the employee upon proper presentation of the bill.
An MSA can only pay for medical care not covered by Gunderson's regular health care plan. It can pay deductibles, coinsurance, copayments, dependent coverages, and expenses-as well as all routine medical, dental, vision, and hearing care expenses not covered by the regular plan.
MSAs differ from Medical Reimbursement plans in that they are nondiscriminatory. They may grow for each employee on a tax-sheltered basis and can become an additional portion of retirement benefits for employees.
They also differ from Individual Medical Accounts (IMAs), which are similar to IRAs in that an individual may save a maximum amount each year on a tax-deferred basis for post-retirement medical expenses. The accumulated funds are alternatively available before age 59 or for the expenses of catastrophic illness not covered by a basic health care plan. These plans are meant for the self-employed or for employees of employers who do not establish MSAs.
IMA funds may be used after retirement to pay for all out-of-pocket medical care services needed by retirees that are not covered by other regular medical care plans, subject to the same tax rules as IRA withdrawals.
While not exactly a gift to the individual taxpayer, an IMA is another way to defer taxes!
How to Invest MSA Money
The MSA must be liquid, in part, to meet any current withdrawals. MSA holders should consider an investment that can be liquidated easily. The illiquid portion can be in any suitable long-term investment approved by the IRS.
IMA funds can be placed in suitable long-term investments since short-term investments are not needed.