Cashing in on Medical Spending Accounts

By Thompson, Peter; Byberg, Trent | Risk Management, September 1995 | Go to article overview

Cashing in on Medical Spending Accounts


Thompson, Peter, Byberg, Trent, Risk Management


Medical spending accounts (MSAs) are a popular fringe benefit offered by many employers. Touted for the potentially dramatic tax savings MSAs can offer employees, large savings are also possible for employers when these accounts are utilized fully.

Employees can set aside part of their salary-before taxes are deducted--for medical expenses. Because putting money into the MSA reduces the employee's taxable salary, the employee does not have to pay federal or state income taxes, or FICA taxes, on that money. Employees can draw money from the MSA to pay medical expenses as these costs arise.

For an employee at a 40 percent marginal tax rate (combined federal and state income taxes and FICA taxes) with $2,000 in medical expenses and $2,000 deposited into a medical spending account, this would amount to $800 in tax savings.

Medical spending accounts also save employers money in two ways. if an employee sets aside more money than is ultimately needed for medical expenses, the extra money is automatically forfeited to his or her employer at the end of the calendar year. The use it or lose it" attribute of MSAs that deter or penalize employee participation provides an obvious windfall for employers. MSA accounts also reduce an employer's portion of the employee's FICA taxes because these taxes are not assessed on the money put into the medical spending account. The more money that employees set aside for MSAs, the better it is for their employers.

ESTABLISHING THE ACCOUNT

When determining the amount of money to place into an MSA, employees must start by anticipating medical expenses they are likely to incur in the coming year. Estimating their expenses will then help employees project their out-of-pocket costs for health insurance deductibles or other expenses that will not be covered by their health plans. Although anticipating medical expenses a year in advance may seem impossible, employees can do a surprisingly good job if they try.

Medical expenses can be broken down into two general types. The first type is medical expenses that are essentially guaranteed. Examples of likely expenses can include routine medical or dental check-ups, regular prescription medications or even elective surgery. If, near the end of the year, an employee still has some funds left in the spending account, he or she may opt to buy a pair of eyeglasses if the purchase could be postponed. It's fairly obvious that these types of medical expenses should be completely covered with medical spending account funds. Employees receive all of the tax benefits, with virtually no risk of forfeiture.

The second type of medical expenses would be emergency or other unanticipated medical expenses. Examples might include an unexpected root canal, a broken arm or an unplanned hospitalization. These accidents may be less common than routine care, but they are usually far more expensive. For employees, debating the likelihood and cost of emergency medical expenses is similar to the frequency/severity tradeoffs familiar to risk managers,

While many employees decide they are "playing it safe" by not putting money into a spending account, this is usually not the best course. When employees realize how much they can save by paying noncovered medical costs with the before-tax dollars in an MSA, these savings generally outweigh the small risk of forfeiture.

Consider the following example. An employee is at the 40 percent marginal tax rate. His child's dentist informs him that there is an 80 percent chance the child will need braces next year, which would cost the employee about $1,200. Let's look at the $2,000 in pre-tax income (subject to $800 in taxes) that would be needed to pay for the braces if the medical spending account were not used. If the employee puts $1,200 of this $2,000 into his spending account, he is guaranteed to have 60 percent of $800, which is $480, left over. If the employee puts nothing into the spending account, there is an 80 percent chance that there would not be anything left of the $2,000 and a 20 percent chance that there will be $1,200 left over. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Cashing in on Medical Spending Accounts
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.