[kman42]

Can anyone tell me the history of the tax-deferred Dependent and Medical Savings Accounts? Why did they set these up like this and what Congressperson came up with the idea?

It seems to me that it would have been much simpler if we could just take a $5000 deduction for appropriate expenses on our tax returns. Why is there a third party company involved that forces us to divine how much we will spend for the year, send it to them monthly, and then fight to get it back?

The only beneficiary I can see is the company in the middle that gets to pool all this money and invest it.

Can anyone offer some insight on this?

[Cold Warrior]

Yeah, those seem weird. I prefer a health savings account with my high-deductible plan. The money rolls over, earns a small amount of interest, and contributions reduce taxable income (iirc).

My guess is that the MSAs are structured that way for Congress' accounting gimmicks.

[ghporter]

They are definitely not for everyone. If you don't use all of it, your HSA is lost income. If you do, you're having some pretty serious issues. Fortunately there are ways to take advantage of an HSA (near the end of the year) that are easy and safe, including stocking up on healthcare related supplies. Not all HSAs are flexible enough for this, but with most you can buy contact lens supplies, OTC cold remedies and other general purpose stuff as well as paying for prescriptions.

If you're in a low deductible health plan though, and HSA is not a good choice.

[Cold Warrior]

Indeed. I have colleagues with low-deductible plans and they face this every year: not enough to cover some things tax-advantaged or too much at the end of the year, whereas mine rolls over. I do have a high-deductible plan, but it's not really high: $1,500. And it doesn't mean I pay out of pocket for everything 100% until I hit that cap: procedures, medication, exams, etc., are covered either free or with flat co-pays or reasonable percentages. And if all those flat rates and percentages add up to $1500, then I'm capped and they pick up the rest.

[kman42]

Those are some of the problems, but my question is, why was it set up this way in the first place rather than as just a a simple deduction like most other things? Why is there all this rigamarole associated with them?

Presumably, the company gets to invest all that money they collect to make a profit. The government must get some cut of the forfeited money that people don't use. Anyone know what that cut is? How much does the company keep?

[pooka]

Out of curiosity CW, who is your plan with?

[Thorzdad]

From the Wikipedia article:

The idea of the MSA appears to have come from health care analysts that were concerned about the problem of "overinsurance." They reasoned that overinsurance was raising the cost of health care expenses. They further reasoned that if patients (as opposed to third-party payers) paid their own medical expenses, then the cost of health care would decrease.[citation needed]

During the early 1990s, think tanks such as the National Center for Policy Analysis and insurance companies such Golden Rule Insurance Company began to promote passage of a law that would allow for tax-free contributions to a medical savings account. Even though the US Congress was under Republican control and the MSA concept was central to the Republican Party's health care agenda, a federal MSA law failed to materialize during the 1990s. However, Congress did pass an MSA pilot as a part of the Health Insurance Portability and Accountability Act (HIPAA) in 1996. In the meantime, some states also pass MSA legislation.

So, it looks like the basic concept of the MSA was from the insurance industry itself.

Remember, an MSA is a completely different animal from an HSA. MSAs are, typically, intended for the self-employed of smaller employers. The HSA is far more of a political animal. The Wikipedia article has a lot of good into.

Additionally, any money left in an MSA can be rolled-over to the next year.

[kman42]

Thanks for the links. I guess I am speaking of Flexible Spending Accounts. Who knew there were so many of these things out there.

It still seems to me that the same goal of making consumers more aware of costs could be accomplished by letting individuals deduct up to $5000 of these expenses rather than forcing consumers to go through a third party company.

[chabig]

Making expenses tax deductible would make you aware of costs, but wouldn't provide the same incentive to reduce them. You might still go to the doctor for a cut finger, knowing it's deductible. Whereas if you have to make some decisions up front and budget for your expected needs, you might not make the same trip to the doctor.

[Cold Warrior]

Originally Posted by pooka 

Out of curiosity CW, who is your plan with?

aetna, through my employer.