One problem with the president's proposal is that working families would have to come up with additional discretionary money to fund their IRAs. By contrast, employers usually provide the funds deposited in MSAs, and the experience of employers offering these plans indicates that, on the average, employees with MSAs have about half the deposit left over at year's end. Permit Backended MSAs. Under a frontended MSA, deposits are made with pretax dollars and the funds not spent on medical care are taxed upon withdrawal. Although these accounts are a substantial improvement over third-party payment of every medical bill, they retain some of the current system's incentives to overconsume medical care.
Funds spent on medical care are tax free.
Deposits are made with aftertax dollars and withdrawals are made tax free. As Figure I shows, this allows people to make unbiased choices between medical care and all other uses of money. After an initial one-year insurance period, accumulated funds can be withdrawn at any time for any reason without penalty . Giving individuals more control over their health care dollars is the logical next step in health care reform. Medical Savings Accounts help achieve that goal.