Medical Savings Accounts Offer New Option for Farmers, Ranchers

Date:  May 05, 1997
Editor: D'Lyn Ford  (505) 646-6528, dlford@nmsu.edu

LAS CRUCES -- Newly created medical savings accounts can help lower health insurance costs for farmers, ranchers and other self-employed or small business owners.

Because they usually can't qualify for group insurance plans, these groups often have trouble finding affordable medical coverage, said Jim Libbin, farm management specialist with New Mexico State University's Cooperative Extension Service.

A tax law change for 1997 created medical savings accounts or MSAs. These accounts allow self-employed people and small business owners to carry less expensive catastrophic health coverage while they set aside money for medical bills in a tax-free account.

"If you're self-employed or have a small business with fewer than 50 employees, which fits most farmers and ranchers in New Mexico, a medical savings account offers some options that haven't been available before," Libbin said.

Setting up the account is a two-step process.

"Basically what you do is find a health insurance plan with a high deductible amount of $3,000 to $4,000 for a family, which lowers your premium," Libbin said. "Then you start a medical savings account, and put money into it to pay that initial $3,000 to $4,000 that isn't covered by the policy."

Health insurance with a higher deductible costs less because insurers don't have to process claims until the deductible is met, he explained. An MSA provides money to cover the out-of-pocket costs of meeting the deductible.

Money deposited in an MSA is for medical bills and cannot be used to pay insurance premiums, Libbin said. Account holders pay a penalty if the money is withdrawn for anything other than medical expenses. However, a major advantage is that the money can stay in an interest-bearing account if it's not used during the year.

"If we don't use it this year, we just carry that balance over in the account from year to year and can continue to make contributions to it," Libbin said. "There are some limits to how much you can contribute, but you can keep rolling that money over and as long as you leave it in the account, it is tax-deductible and accumulates in a tax-free manner."

Using the account is fairly simple, Libbin said.

"If you need to pay for a doctor's visit, you can even write a personal check and then reimburse yourself from the MSA."

The Internal Revenue Service will allow up to 750,000 people to open MSAs in 1997 as part of a trial enrollment, Libbin said. For more information about opening an MSA, talk to your tax adviser.