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Posted On: Aug. 24, 1997 12:00 AM CST

WASHINGTON-The growth of tax-favored medical savings accounts is, as expected, very slow.

Through April 30, just under 10,000 MSAs had been set up, according to an Internal Revenue Service census.

Those MSAs are authorized under a four-year pilot program Congress approved last year as part of a broader health care portability law.

The law allows those who are self-employed and employees working at companies with two to 50 employees to set up tax-favored MSAs.

The relatively small number of MSAs being set up is no surprise to insurers, agents, banks and others promoting MSAs.

They say it has been difficult explaining to the public how MSAs work.

However, insurers and others say interest in MSAs began to pick up in May and June, especially from well-paid, self-employed professionals, such as law firm partners, who have grasped the tax advantages associated with MSAs (BI, May 12).

As a result, MSA enrollment should be considerably higher by the next IRS census, which will be published in early October and will include MSA enrollment through the end of June.

Still, it is unlikely that the number of MSAs established through May or even through the end of the year will approach the limits set by Congress.

Under the 1996 law, up to 750,000 MSAs can be established through Dec. 31, 2000.

At that point, Congress will decide whether or not to continue the MSA program. If legislators do end the program, though, existing MSAs will be allowed to continue.

The law also set a 375,000 MSA cap by April 30, 1997; 525,000 by June 30, 1997 and a 600,000 limit by June 30, 1998.

Some MSA advocates had predicted that interest in MSAs would be so great that the congressionally set caps would be quickly reached.

Those predictions, as evidenced by the IRS census, have been off the mark.

Under a tax-favored MSA, which must be linked to a high-deductible indemnity plan, contributions earn tax-deferred interest.

Money in an MSA can be withdrawn tax-free to pay for uncovered health care expenses. Amounts withdrawn for other purposes are taxed as an ordinary income with a 15% surcharge tacked on.

The 15% surcharge, though, is not assessed on funds withdrawn by people after they turn 65 years old.

Of the 9,720 MSAs that have been established, 1,787 were for individuals previously uninsured, the IRS said.