Self-employed workers, a group which includes veterinarians and nutritionists, often turn to high-deductible health insurance to keep insurance premiums down. But what happens when they suddenly owe thousands of dollars to cover the deductible in an emergency?

A two-year-old federal plan now allows self-employed workers to set up special tax-deferred medical savings accounts to cover such emergencies as well as pay other out-of-pocket medical expenses. The plan functions much like a mini-individual retirement account (IRA). But there are some big differences.

With an IRA, you only defer taxes. When you take the money out, you pay them. But with a medical savings account, you never have to pay the taxes if you use the money for federally approved medical costs. And if you don't use the money, it can continue to grow in an investment account without being subject to taxation.

It sounds great. After all, most people would like a way to reduce the federal tax bite. But there are lots of pitfalls. First, you may find it hard to find any financial institution which will set up a medical savings account up for you. Many banks, insurance companies and stock brokerage houses don't offer them.

"Nobody knows anything about them," says David Price, a consulting nutritionist and BEEF Magazine contributor, who has one for his family. But, he adds, "These would be of interest to anyone who is self-employed."

It may also be hard to get any information about them from accountants, financial advisors or business consultants. For instance, BEEF asked three veterinary practice consultants for their views on medical savings account, but none felt they knew enough about them to offer an opinion.

Moreover, Americans have been slow to use this new tax break. It may be because few firms offer the accounts. Or, it may be that accountants are not suggesting them to their clients. Or, it may be that self-employed workers just aren't interested or don't understand the benefits the plans may offer.

At Wyoming Financial Insurance in Casper, WY, demand for MSAs, as medical savings accounts are known, comes in dribs and drabs. "We've probably set up one or two a month since it's been available," says David Sechrist, an account executive with the firm.

MSAs work to your advantage several ways. * First, they save you taxes. The higher your tax bracket, the more you save. You can save even more if you live in states such as California which allow MSA deductions from state income taxes.

Blue Shield of California explains how this works in a question-and-answer section posted on one of its Internet Web sites. "If for example, your combined California and federal tax rate is 35 percent, then for every dollar you start with, in the end you have only 65 cents to spend on health care. With an MSA you will be able to use 100 percent of every dollar you deposit in your MSA (plus interest) for qualified health care. In a sense, with an MSA, the government hands you 35 cents per dollar (in this example) on top of your current health care budget."

* Second, MSAs do more than just provide a fund to meet deductibles on catastrophic medical bills. They can also generate tax-free funds for approved out-of-pocket medical expenses, such as eye care, dental work and chiropractic care.

And, if you remain healthy, any unused funds are invested, tax free, just like the immensely popular Individual Retirement Accounts. "It can function as a retirement account if you never use it," says Wyoming Financial's Sechrist. "An MSA is nothing more than a glorified IRA, except it's for medical."

Still, many people aren't jumping on the MSA bandwagon. Aside from the problem of availability, there are plenty of hurdles to clear to make an MSA work. For example, you have to have a health insurance plan that meets federal guidelines to be used with a medical savings account. If your health insurance plan doesn't qualify, you would have to find one which did. That could mean changes in coverage or costs if the new insurance plan differs from the old one.

MSAs may also offer lower long-term returns than other investments. "Most MSAs are going to be in a guaranteed or fixed income account," says Sechrist. "Most of these fixed income accounts are paying four to four-and-one-half percent."

On the other hand, such accounts offer security the high flying stock market can't. "If you bought stock with MSA money and the stock went down twenty percent, all of the sudden you've got twenty percent less money," Sechrist says.

The IRS and some state governments will also sock you with a hefty penalty if you convert MSA funds to non-medical expenses. Financial columnist Jane Bryant Quinn noted that pitfall in a column on the pros and cons of medical savings plans.

"MSAs are dandy for healthy people with plenty of money," Quinn wrote. "The plan is risky, however, for people on tight budgets. You get high deductible insurance to protect you from catastrophic medical bills. But the savings part is another matter. What if you need the MSA money for a non-medical emergency? There's a stiff penalty on withdrawals."

MSAs also require careful recordkeeping. IRS audits are rare, but if you are audited, you may need to provide a tax examiner with detailed records to show that MSA withdrawals did, in fact, go to qualified medical expenses.

The bottom line is that MSAs could be a ready source of tax exempt cash in a medical emergency. But if you need the money to pay for car repairs, a new roof or just want to spend the money on a vacation, you'll be worse off than if you never had never put the money in an MSA.

And, if you still opt for an MSA, you may want to check with your accountant, a financial advisor, your health insurer and IRS regulations to make sure you understand the program, its risks and the short- and long-term advantages and disadvantages of putting your money in a medical savings account.

In other words, read all the fine print because MSAs are like a lot of other federal programs. They may work for most people, but the only thing that counts is whether it works for you.

Here are a few facts to help you understand how medical savings accounts work (MSA):

* An MSA isn't free. The firm that handles your Medical Insurance Account likely will charge a fee. The fees could include a one-time fee for setting up an account and additional fees for administering it.

* Federal regulations set limits on the amount you can contribute to an MSA. If you have individual coverage, you can contribute 65% of your plan deductible each year. If your insurance covers two or more people, you can contribute up to 75% of the deductible annually.

* Disbursement of MSA funds to cover medical expenses will vary depending on the plan you choose. Some MSAs offer a debit card which can be used to pay expenses with automatic deductions from your MSA account. Whatever plan you choose, be sure to keep careful records of expenses in case you are audited by the IRS.

* You can use an MSA for non-medical expenses. But if you are under age 65, you will owe regular taxes on such withdrawals and face an additional 15% federal penalty. You may also face state tax penalties. If you are 65 or older, you don't face penalties, but you will owe income tax on non-medical uses.

* If you leave a health insurance plan which qualifies for an MSA account and you are under age 65, you will no longer be able to withdraw funds from your MSA without penalty or taxes, even if you use the money for medical services.

Once you reach age 65, however, you will only be subject to normal taxes as part of your gross earnings.

* There are a wide-variety of medical expenses which can be covered from MSA funds, including, for example, telephone equipment for the hard-of-hearing, vaccines, x-rays and psychiatric services, to name a few. But there are many that are not, including non-prescription medication and health programs offered by health clubs and gyms. Check with your plan or the IRS for particulars.

Sources: Wyoming Financial Insurance, Blue Shield of California

If you had a dollar to invest, where would you put it. Each year, it seems, the choices get more complex. In addition to medical savings accounts, there are standard individual retirement accounts, Roth IRAs, tax exempt municipal bonds and any number of taxable investments including parking your money in an old fashioned bank savings account where it might earn a couple percent interest. Or you could pay down a high interest rate credit card.

The point is that investing is no longer a simple matter. To make the best decisions, you need to consider your tax bracket, when you might need the money, how quickly you can get it in an emergency, penalties for early withdrawal and where you can get the best rate of return.

A medical savings account, with its own quirky rules, is just one possibility. And as we move into the 21st Century, the fine art of investing probably isn't going to get any easier.