WealthManagement Magazine

Medical Savings Accounts

A little more than a year ago, a new kind of savings plan burst onto the already-crowded investment scene. Called a medical savings account, or MSA, it combined a health insurance policy with a tax-deferred investment account that insurers thought would sweep the nation.So far, however, MSAs hav e fallen flat, especially on Wall Street. Although more than 50 insurers signed up to provide the high-deductible

A little more than a year ago, a new kind of savings plan burst onto the already-crowded investment scene. Called a medical savings account, or MSA, it combined a health insurance policy with a tax-deferred investment account that insurers thought would sweep the nation.So far, however, MSAs hav e fallen flat, especially on Wall Street. Although more than 50 insurers signed up to provide the high-deductible policies that make up the insurance portion of the plan, Merrill Lynch, Mellon Bank Corp. and Wells Fargo are among the few big-name financial services firms giving the MSA a whirl.

As of June 30, slightly more than 22,000 MSAs had been opened nationwide, well below the 525,000 cap set by legislators. Today, there are 40,000 or so MSA accounts--nowhere near the 600,000 allowed by April 15 of this year.

While insurers and financial firms say sales have picked up, MSAs have been a tough sell for several reasons. Rules governing them are complicated. MSAs require people to make additional investing decisions in a world already chockablock with 401(k)s, IRAs, Keoghs and other retirement plans and accounts.

Plus, many individuals can't afford the high deductibles, which start at $1,500 for individuals and $3,000 for a family. That's in addition to monthly insurance premiums, which vary nationwide. As a result, most sales have gone to high-income, self-employed people--especially those in good health.

Bob Blain, senior vice president of retirement plan services at Raymond James in St. Petersburg, Fla., says his firm decided not to offer MSA accounts even though some insurance reps asked about them. "It's extremely complicated and there are a lot of moving parts," Blain says. The insurance reps work for Planning Corporation of America, an insurance company owned by Raymond James.

Among other things, Raymond James was concerned about charging commissions and managing money in an account that, at least initially, is invested in low-risk, liquid securities that can easily be converted to cash to pay medical bills. Clients who want MSAs are "probably better served by the insurance industry," Blain says.

David Neikrug, president of The Hakol Benefits Group Inc., a Chicago consulting firm, is more blunt about why brokerage firms haven't leapt to sell MSAs: "It's a waste of time. Nobody understands it, and they can't charge for it."

Individuals can only sink $1,462.50 a year, maximum, into an MSA tax-deferred account, while families can add a total of $3,375. That's less than maximum IRA contributions. Meanwhile, MSA money can quickly disappear to cover medical expenses, although clients can pay medical bills out of their own pocket and let the MSA money accumulate.

On the plus side, MSAs offer self-employed individuals and small companies the chance to buy health insurance and invest money, which can grow tax-deferred until age 65. After that, money can be withdrawn and taxed as ordinary income or withdrawn tax-free if it is used to pay medical bills.

Slow Going "The market has not grown as quickly as most people thought," admits Dennis Stover, a vice president at Mellon Network Services, a division of Pittsburgh-based Mellon Bank Corp. However, "The issue has not been the bank's products as much as the insurance products."

Many insurers didn't have MSA policies approved until the second half of last year, Stover says. Today, Mellon has agreements with 32 insurers in 42 states. Although sales have picked up, the biggest issue restraining the MSA market today is that most people still don't understand how the accounts work, he adds. Mellon, like many other companies offering MSAs, gives customers a MasterCard MasterMoneytrademark debit card and a checking account that draws from the MSA. However, a client must have at least $3,500 in an MSA account at Mellon before they can open a brokerage account at Dreyfus Investment Services, a Mellon subsidiary, through which mutual funds, stocks and other securities can be purchased. Only balances greater than $3,500 can be invested in the brokerage account.

Wells Fargo of San Francisco allows its MSA customers to invest savings above $2,500 in more than 100 mutual funds as well as stocks and bonds in an account at Wells Fargo Securities. A spokesperson declined to say how many accounts havebeen opened.

Merrill Lynch announced its MSA account last September. "Merrill Lynch's approach is always to dig deeply to see what the opportunities are," says Patrice Regan Schreiber, vice president of product development and management at Merrill's next-generation marketing division in Princeton, N.J. "We were getting a lot of questions from our clients into what [an MSA] was and was Merrill going to supply it."

Although Merrill wouldn't say how many accounts it has opened, business is picking up as more clients understand the benefits, Schreiber says. The firm offers more than 2,000 mutual funds to MSA clients. Individual stocks, bonds and other securities also are available.

However, one Merrill rep says he only sells MSAs to existing clients who request them. "We're only doing it to keep people from going somewhere else," he says. "I'm sure if we started calling people we could get them to [open an MSA account]. But we can't make money at it."

Meanwhile, more MSA providers are offering additional investing choices. In January, Time Insurance Co. and Fortis Investors of Milwaukee added seven of the 14 Fortis Mutual Funds to their list of MSA investments. Anyone with an MSA account open for more than one year is eligible to invest in the funds, which include a money market, bond and stock funds.

Clients who think they won't draw money from MSA accounts for five years or more are good candidates for fund investments. "That's why we've moved toward that, and you will see other companies do that, too," says Scott Krienke, Time Insurance's vice president of marketing.

The Golden Rule Insurance Co., a Lawrenceville, Ill., insurer and the biggest MSA player with more than 24,000 accounts, plans to offer other investment options this year. Right now, the insurer pays 5% on its MSA accounts.

So far, Golden Rule isn't fazed by Wall Street's lack of enthusiasm. "There's not a lot of interest right now, but there's not a lot of money involved," says company spokesperson Tenna Merchent. "Ten years from now, it's going to be a different story."

Medical Savings Accounts, signed into law as a four-year experiment in 1996, combine a high-deductible insurance policy with a savings and investment account that can grow tax-deferred. However, rules governing MSA accounts are tricky. Here are a few basics:

* Only self-employed people and companies with 50 or fewer employees can establish MSAs. MSA customers choose their own physicians, a feature rapidly disappearing with the rise of managed health care. However, unlike group plans, MSA policies can exclude existing medical conditions.

* Individuals can choose a maximum health insurance deductible of $1,500 to $2,250. Family deductibles range from $3,000 to $4,500. Individuals can set aside up to 65% of their deductible, or a maximum of $1,462.50, to fund an MSA tax-deferred savings and investing account. Families can set aside up to 75%, or $3,375.

Golden Rule Insurance Co. of Lawrenceville, Ill., calculates that for a husband, wife and children living in south suburban Chicago, a $3,000 deductible plan funded at 75% for an MSA account would cost $344.82 a month. That includes $187.50 for the MSA fund and $157.32 for the insurance. A traditional insurance plan for the same family with a $500 deductible would cost $321 to $405 a month.

An insurer's financial health and background are important. Some insurers have a reputation for playing hardball when the time comes to pay benefits. The last thing you want is for your client to be stuck with huge medical bills an insurer won't pay.

Examine the fine print. Paying for health care services won't count toward the deductible unless the services are covered by an MSA's insurance plan. After meeting the deductible, however, claims are usually paid at 100%. Also, check out the fees that go along with an MSA--they vary from company to company.

Sources: General Accounting Office, Golden Rule Insurance Co.

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