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Medical savings accounts, touted as giving employees at small businesses a new health insurance option, also are being tapped by some of the nation's highest-paid professionals: partners at law firms.

Partners, who for tax reasons are considered self-employed, are latching on to MSAs linked to high-deductible health care plans for the tax breaks they offer.

"We are very cognizant of the tax advantages. MSAs effectively give you a tax deduction for medical expenses from the first dollar. This really is a winner," said Todd Maynes, a tax partner with Kirkland & Ellis in Chicago, which on Jan. 1 bumped up an existing high-deductible plan for partners to make it eligible for linkage to MSAs.

At Gardner, Carton & Douglas, more than half of the Chicago-based law firm's 86 partners recently opted for a high-deductible plan linked to MSAs.

"The way the figures came out, this really saved money for them. This was something very beneficial for partners," said Richard Menson, a partner with the firm.

In addition, several hundred members of the Chicago Bar Assn. have selected a high-deductible-MSA-linked plan the association recently sponsored.

"This is another benefit of membership," said Terry Murphy,

the bar association's executive director.

While perhaps Congress did not have six-figure partners at law and other professional firms in mind when it passed legislation bestowing tax-favored status on MSAs meeting specified standards, the nation's professional elite may reap the most advantages from MSAs.

Typically, law firm partners pay their own health insurance premiums. But because they are considered self-employed, they are currently only entitled to take a tax deduction on 40% of the premiums.

Those premiums are paid for with after-tax dollars. Self-employed professionals, such as partners at law firms, are not eligible for flexible benefit plans in which premiums and other health care expenses can be paid for with pre-tax dollars.

While law firm partners, like other taxpayers, can deduct uncovered medical expenses exceeding 7.5% of income, their incomes often are so high that it would take a catastrophic medical bill in order for partners to be eligible to deduct the expense.

But the tax situation in a high-deductible-linked MSA is vastly different. Like traditional insurance, 40% of the premium for the high-deductible plan is tax-deductible. But 100% of the annual contribution-currently up to $1,462 for those opting for single coverage and $3,375 for family coverage-to the MSA is tax-deductible.

Money in the MSA, like an individual retirement account, earns tax-deferred interest. However, money can be withdrawn tax-free to pay for uncovered medical expenses, like those that fall under the deductible. Funds withdrawn for other purposes are taxed as ordinary income with a 15% surcharge tacked on. The 15% surcharge, though, is not assessed on money withdrawn by individuals after they turn 65.

Indeed, an administrator of one law firm said MSAs should be looked at as a kind of supplemental retirement plan with the potential for a significant accumulation of assets. In fact, the administrator noted that an MSA has even more tax breaks than a pension plan, pointing out that money taken from an MSA at retirement to pay for medical expenses can be withdrawn tax-free, while pension benefits are taxable.

These tax breaks are a boon to the self-employed, such as law firm partners.

"The self-employed have never had a health insurance tax break like this before," said Tenna Merchent, an assistant vp with Golden Rule Insurance Co. in Indianapolis.

"MSAs make a lot of sense for the self-employed," added John DiVito, a partner and president of Flexible Benefits Service Corp., a brokerage and general agency in Des Plaines, Ill.

But not all high-paid professionals can qualify for MSAs. Written into last year's law creating tax-favored MSAs is a provision that restricts MSAs to employers with fewer than 51 employees.

Despite this 50-employee cap, partners at law firms and other professional firms with hundreds of employees are eligible for MSAs. Because partners are considered self-employed, the sizes of their firms are irrelevant.

Still, not all law firms are jumping to give partners an MSA option. For example, McDermott, Will & Emery decided against offering MSAs because, among other things, the pricing of high-deductible health insurance plans linked to MSAs was not attractive enough to give partners a significant enough incentive to opt for the plans, said Sophia Chrusciel, a partner at the Chicago-based firm.

While tax breaks are a powerful attraction for professionals and others to opt for MSAs, they are not the only reasons why individuals are signing up for them.

"If you are a young, healthy male, an MSA may be very appealing" because a significant nest egg can be built up, said a spokesman for Green Bay, Wis.-based Employers Health Insurance Co., a Humana Inc. unit that offers high-deductible linked MSAs in 14 states.

On the other hand, MSAs won't be very attractive for families with heavy medical expenses, the Employers Health Insurance Co. spokesman said.

While MSAs are being snapped up by tax-savvy partners at professional firms, MSA providers say the going is much slower in the small-employer market.

Providers say one of the things holding back MSA growth among smaller employers is that the heart of their distribution network-independent insurance agents-do not always fully understand all the tax implications of MSAs.

"You need a real education process for agents," said Scott Stevens, vp-marketing at United Chambers, a Naperville, Ill.-based insurer that became one of the first insurers to offer an MSA product for the small-employer market.

"It is a long learning curve for distributors, like agents and third-party claim administrators," concurred Porter O'Meara, second vp-intercompany marketing and development at Time Insurance Co. in Milwaukee.

But some MSA providers are doing something to educate agents on how MSAs work. For example, Blue Shield of California in San Francisco held an MSA workshop for agents to explain the ins and outs of MSAs.

"This was very important to get key agencies to understand MSAs and the law," said Ken Prewitt-Wood, a senior vp at Blue Shield of California, which says it has sold a couple thousand high-deductible-linked MSA plans.

And one company, MSAver Resources L.C., an MSA administrator in Kansas City, Mo., works with insurers to help them train and educate agents in how to communicate the benefits of MSAs to policyholders.

But it isn't only agents that don't always understand how MSAs work. One of the biggest misunderstandings about MSAs is the limit Congress imposed on the number of MSAs that can be established, MSA experts say.

Under law, only 750,000 MSA policies can be established. The Internal Revenue Service is charged with conducting several censuses to determine how many MSAs have been set up.

If, for example, the IRS found that 2 million accounts were established during the first four months of 1997, no more MSAs could be established. But contrary to what some people believe, it could not force already established MSAs to be terminated, said Bill Draznik a vp with Trustmark Insurance Co. in Lake Forest, Ill.

Until the IRS completes its census-which isn't expected until June-it won't be known how many MSAs have been set up.

But it is widely believed that the number is not close to the 750,000 MSA cap.

"I don't think the cap will be an issue this year, because many programs are now only being established," said Dennis Stover, a vp with Mellon Network Services in Pittsburgh, a unit of Mellon Bank that entered the MSA market earlier this year.

Even if the cap is hit, some say it would only be a matter of time before legislators increase or remove the cap.

"Congress could listen to the public and ultimately lift the cap," said Marty Rosen, senior vp and chief operating officer for NYLCare, a subsidiary of New York Life Insurance Co.

Others, though, note that MSAs-despite the tax breaks bestowed upon them by Congress-are unlikely to ever be more than a niche product in the health insurance market.

"I don't think the tax advantages are so compelling that people would leave an HMO that provides first-dollar coverage and has small copayment requirements," said Mr. Prewitt-Wood of Blue Shield of California.

And MSAs may not work for all those interested in the concept. For example, some people want higher deductibles than the law allows for health insurance plans linked to MSAs, noted Ron Mimick, product manager for Mutual of Omaha.

Under law, the maximum deductibles for a health insurance plan linked to a tax-favored MSA are $2,250 for individual coverage and $4,500 for family coverage.