One of the banking industry's most feared competitors, Merrill Lynch & Co., is offering medical savings accounts for small-business employees.

The accounts, which are linked to insurance policies with deductibles as high as $4,500, are designed for self-employed people or businesses with fewer than 50 employees.

Either business owners or employees can contribute to the accounts, which are tax-deferred savings used to pay employees' out-of-pocket medical expenses.

Merrill Lynch's entry into the market is significant because bankers have long lamented the loss of small-business customers to the brokerage firm.

Sixty percent of bankers surveyed in a recent Consumer Bankers Association small-business study said Merrill Lynch was one of their primary competitors, up from 56% the previous year.

In offering the medical savings accounts, Merrill Lynch joins a crew of banks participating in a four-year pilot program set up by the Internal Revenue Service for the first 750,000 accounts nationwide.

More traditional health insurance often comes with too much cumbersome paperwork or is too expensive for businesses without a full-time human resources staff.

"There are millions of healthy Americans for whom traditional health insurance has simply not made good economic sense," said Allen N. Jones, senior vice president and director of marketing for the Merrill Lynch Private Client Group.

Mellon Bank Corp. and Fifth Third Bancorp. also offer medical savings accounts whose cash can be invested in their bank's proprietary mutual funds.

Wells Fargo & Co.'s medical savings accounts allow account holders to open a brokerage account once the account balance reaches $2,500.

But Merrill Lynch, which manages $979 billion of account assets, has access to a wider array of investment options and is viewed as having more investment expertise than most banks.

Individual medical savings account holders can contribute as much as $1,462.50 a year, and family account holders can contribute as much as $3,375.

After the account holder reaches 65, the money can be used for any purpose. If the money is withdrawn for nonmedical purposes before that time, it is subject to income tax and a 15% penalty.

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