[Congressional Record Volume 142, Number 43 (Tuesday, March 26, 1996)]
[Extensions of Remarks]
[Pages E449-E450]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




       MEDICAL SAVINGS ACCOUNTS: FANCY WORDS FOR NEW TAX SHELTER

                                 ______


                        HON. FORTNEY PETE STARK

                             of california

                    in the house of representatives

                        Tuesday, March 26, 1996

  Mr. STARK. Mr. Speaker, medical savings accounts [MSA] will be voted 
on this week as part of the health insurance reform bill developed by 
the Republican leadership.
  The MSA provisions should be deleted.
  Everyone who thinks about them will quickly understand that they are 
destructive to the health insurance system, because they skim out the 
healthiest people in our society. Sicker and older people will be left 
behind in the traditional insurance pool, where rates will have to be 
raised to cover the costs of the more expensive people in that pool. 
These higher rates will, in turn, make insurance unaffordable to more 
people, thus increasing the number of uninsured in our society. MSA's 
may be good for individuals who are healthy at the present time, but 
they are bad for society that is trying to encourage health insurance 
for as many people as possible.
  MSA's are an every-man-for-himself, to-hell-with-society philosophy.
  What is not so clear is that they are a massive tax shelter.
  I would like to include in the Record the portions of a paper by Iris 
J. Lav of the Center on Budget and Policy Priorities, which details how 
gross this new tax break is. Republicans talk about tax reform and tax 
simplification, but anyone who votes for MSA's is voting for tax 
complication and tax unfairness:

MSA Provisions in Health Care Reform Bill Creates Tax Shelter and Casts 
                Doubt on Expansion of Insurance Coverage

                            (By Iris J. Lav)

       The Medical Savings Account (MSA) provision in the House 
     health care reform bill creates an extensive new tax shelter 
     opportunity, the cost of which would grow over time. For 
     people in good health, the MSA provision would be the 
     equivalent of enacting a new Individual Retirement Account 
     program--far more generous than the IRAs available prior to 
     the Tax Reform Act of 1986.
       Healthy, higher-income people who hope to retain for other 
     purposes the tax-advantaged funds not needed for medical care 
     would be attracted to use the MSAs with high-deductible 
     insurance plans. People with less good health would find high 
     deductible insurance plans less attractive and would be 
     become segregated into conventional insurance plan, thereby 
     raising the cost of such plans. As a result, it could become 
     more difficult and less affordable for employers to offer 
     adequate health insurance to employees most in need of it--
     potentially undermining the basic purpose of the health care 
     reform legislation.
       The potential problems caused by MSAs can be mitigated (but 
     not eliminated) by limiting the ability of healthier people 
     to use MSAs as a tax shelter for general purpose saving and 
     investment. The tax shelter potential could be lessened by:
       Significantly increasing the penalty for use of MSA funds 
     for purposes other than paying medical bills.
       Taxing interest earned on MSA accounts annually.
       Recapturing foregone FICA (Social Security and Medicare) 
     payroll taxes for amounts withdrawn from MSAs for purposes 
     other than paying medical bills.
       Raising the age at which funds may be withdrawn from MSAs 
     for any purpose without incurring a penalty to age 65, so 
     funds must remain available to expend on medical care until 
     the individual qualifies for Medicare.


                             msa provisions

       Under the MSA proposal in the health care reform bill, 
     qualified taxpayers (either directly or through their 
     employers) are allowed to contribute yearly amounts to an 
     MSA, up to a specified ceiling. To be qualified, taxpayers 
     must have insurance coverage through a high-deductible health 
     plan. Taxpayer (or their employers) may contribute the amount 
     of the plan deductible of the MSA, up to $2,000 for an 
     individual and $4,000 for a family.
       Amounts individuals contribute to MSAs may be deducted on 
     their income tax when determining adjusted gross income, 
     which means they may be deducted whether or not the 
     individual itemizes other deductions. If MSA contributions 
     are made by employers on behalf of individuals (presumably 
     even if salaries are reduced to allow the contributions to be 
     made), the amounts contributed are not counted as wages or 
     salary for purposes of computing income, FICA (Social 
     Security and Medicare), or unemployment taxes. The interest 
     earned on amounts accumulated in MSA accounts also is exempt 
     from taxation.
       Taxpayers may use the funds in their MSAs to pay any 
     medical expenses that could qualify as itemized deductions on 
     the taxpayers' income tax. Funds withdrawn from MSAs that are 
     used to pay permitted types of medical bills are never taxed.
       If funds are withdrawn from the MSA for non-permissible 
     purposes, they are subject to income taxes as ordinary income 
     in the year they are withdrawn. If the taxpayer is below age 
     59\1/2\, amounts withdrawn for non-permissible purposes also 
     are subject to a 10 percent penalty. After the taxpayer 
     attains age 59\1/2\, funds may be withdrawn from MSAs for any 
     purpose without incurring a penalty.


                       msa's create a tax shelter

       For higher-income taxpayers who anticipate remaining 
     healthy, MSAs represent a new, tax-advantaged way to 
     accumulate savings. Because contributions made by or through 
     an employer are permanently exempt from Social Security and 
     Medicare payroll taxes and are exempt from income taxes until 
     withdrawn, and because the interest earned on amounts 
     remaining in the MSA is allowed to compound without yearly 
     taxation, the 10 percent penalty on withdrawals for non-
     permissible purposes is not

[[Page E450]]

     sufficient to prevent MSAs from becoming a tax shelter. Even 
     after the penalty is paid, the after-tax return to savings in 
     an MSA would under many circumstances exceed the return to 
     conventional savings.
       Figure 1 [not printed in Record] shows the difference to a 
     taxpayer in the 36 percent federal income tax bracket between 
     saving $3,000 of gross earnings under current law and saving 
     the same amount in an MSA. In each case, the deposit is held 
     at a three percent rate of interest. Under current law, the 
     taxpayer would have $1,742 in after-tax funds to deposit in a 
     conventional savings account. (The $3,000 gross earnings 
     would be reduced by a 36 percent income tax, an effective 
     state income tax of 4.5 percent after accounting for 
     deductibility against federal taxes and a 1.45 percent 
     Medicare tax. Taking away 41.95% of $3,000 leaves $1,742.) If 
     those funds remain on deposit for 10 years with interest 
     taxed yearly, they would grow to $2,079. Under the MSA 
     provision, however, the taxpayer would deposit the entire 
     $3,000 and interest would compound free of tax. After 10 
     years, the account would hold $4,032. The taxpayer could 
     withdraw the funds for purposes other than medical care, pay 
     income tax and the 10 percent penalty on the withdrawn 
     amounts, and have $2,236 remaining.
       In other words, after 10 years the value to the taxpayer of 
     the funds saved in the MSA would exceed the value of 
     conventionally-saved funds by 7.6%, even though a penalty was 
     assessed for non-permissible use of the funds. If during 
     those 10 years the taxpayer attained age 59\1/2\, no penalty 
     would be assessed and the value to the taxpayer of the MSA 
     savings would exceed the value of the conventional savings by 
     more than 15 percent. As shown in Figure 1, the differential 
     value of the MSA savings grows with the length of the holding 
     period. After 20 years, an MSA withdrawal with penalty 
     exceeds the value of conventional savings by 21 percent, 
     while an MSA withdrawal after age 59\1/2\ exceeds the value 
     of conventional savings by 30 percent. (It may be noted that 
     the cost of the Treasury in foregone tax revenues also would 
     increase over time, as growing amounts of savings are likely 
     to be sheltered from taxation.)

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