Rx from Congress: Limited Medical IRA Law

By Cocheo, Steve | ABA Banking Journal, October 1996 | Go to article overview

Rx from Congress: Limited Medical IRA Law


Cocheo, Steve, ABA Banking Journal


A somewhat limited variation on the individual retirement account theme, designed to address medical expenses rather than retirement costs, goes into effect next year under pilot-program legislation passed towards the end of the summer.

Banks and other organizations will be permitted to market "medical savings accounts" under the Health Insurance Portability and Accountability Act. The legislation is effective in January 1997.

Under the new law employees or their employers will be permitted to make tax-protected contributions to a medical savings account--set up as either a trust or custodial account--that will not be taxable if withdrawn for medical expenses. Employee contributions are deductible from employee income and employer contributions are excludable from employee income (unless they are made under a "cafeteria" benefit plan). Earnings on funds in the accounts are not taxable as they are made, though they could be subject to tax if withdrawn, along with principal, for purposes other than medical bills.

There are some restrictions that must be satisfied before people can use these accounts:

1. High-deductible required. To make contributions to an account (or to have employer contributions made) employees or self-employed people must be covered by a high-deductible medical insurance plan, Under the legislation, a high deductible is one of at least $1,500 and no more than $2,250 ($3,000 and $4,500 in the case of family coverage). Other limits also apply.

2. Contribution cap. The maximum amount that can be contributed by either employee or employer in a single year is 65% of the deductible, in the case of individual coverage, and 75% in the case of family coverage.

3. Company size cap. The employer, either in the previous year or the year before that, must have employed no more than 50 people. Transition provisions cover growing companies.

4. Ban on most other coverage. The employee must not be covered by some other health insurance or plan, with some exceptions. …

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