Medical Savings Accounts if employer has more than 50 employees.

[Guest Don Miller]

I understand that only self employed individuals and employers with less than 50 are eligible to contribute tax free and earnings grow tax free. What about a larger employer? Can a large employer establish MSA but there will not be any tax advantages; employer cannot deduct contribution and it is subject to inclusion in employee's taxable gross. Is there such a thing as a non-qualified MSA? Must the employer contribute then to all employees?

[Guest kchristy]

Golden Rule Insurance Company, among others, implemented non-qualified "MSAs" for their employees well before there was such a thing as a qualified MSA. One common plan that I read about gives cash bonuses at the end of the year to those employees who don't use up their annual deductible-- in essense, permitting the employee to share in the savings from their medical restraint and/or price-shopping for care.

With regard to contributions, I'm not certain. However, it's generally safe to vary contributions by class and even by negotiated terms of hire, so I would think that the employer could deduct the amounts paid to the employee as a legitimate business expense, and pay whatever payroll-related taxes are required regardless of how they decide who is eligible for receiving MSA payouts.

[Guest MDB]

Non qualified MSA have existed for years. They continue to thrive. Our three manufacturing companies have had them for 4 years. Prior to that time I had developed them for dozens of employers. Take a look at what Forbes, Inc. has done.

[Linda]

Could you explain a non-qualified MSA? I am not familiar with that term.

[Guest MDB]

A non qualified MSA is an employer funded incentive arrangement that is similar to the qualified MSA's established a few years ago. The significant difference is that the guidelines for structuring them are not as rigid (deductibles,amounts set aside etc). In addition these incentive amounts are not excluded from one's income tax when they are received. They have existed for years and continue to thrive in both the over and under 50 markets.

[Guest SLCraig]

MDB...we have recently lost our only market for qualified MSA's in the state of Maine. When you talk of the non-qualified plans, do have specific insurers/financial institutions that offer these programs? If so, which? If not, are these arrangements that you set up on your own?

Thanks for any info!

[Guest MDB]

SL Craig,

You really need to know how to design them yourself. Begin with an insurer that will provide a high deductible insurance plan. Not sure how much this helps.

[Guest BENEFISH]

Linda, I can understand your confusion relating to "non-qualified MSAs". MDB keeps talking about qualified and non-qualified MSAs as if there is such terminology. As you know, those terms should be reserved for retirement plan discussions where there is a "qualification" process resulting in a written favorable determination by the IRS as to the "qualified" status of a plan. MSAs, while there are rules which relate to the taxation of such benefits, do not require favorable determination. You just have to be able to affirm that you have played by the rules if an IRS inquiry is made. To my limited knowledge, there are no welfare plans which require "qualification".

Now, let's talk about MSAs--those for which rules are prescribed and the other kind (heretofore called non-qualified MSAs). You can create a plan design similar to an MSA whereby a portion of the benefit over a specified high deductible amount is self-insured by the plan sponsor. The biggest difference in that plan and an MSA is that an MSA allows for amounts not used at year-end to be accumulated for future use or even future contribution to a "qualified" retirement plan. If excess amounts in an MSA look-alike plan are made available for accumulation or for cash distribution, then the entire amount available for reimbursement is taxable to all participants whether or not they received medical reimbursement, cash, or both. MDB, to avoid this problem, study the IRS' doctrine of constructive receipt.