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Taxmap/pubs/p969-001.htm#TXMP44bbf160 Medical Savings Accounts (MSAs)

MSA

Archer MSAs were created to help self-employed individuals and employees of certain small employers meet the medical care costs of the account holder, the account holder's spouse, or the account holder's dependent(s).

A Medicare Advantage MSA is an Archer MSA designated by Medicare to be used solely to pay the qualified medical expenses of the account holder who is eligible for Medicare. No Medicare Advantage MSAs have been established as of the revision date of this publication.

Taxmap/pubs/p969-001.htm#TXMP76c6f3de Archer MSAs

MSA

An Archer MSA is a tax-exempt trust or custodial account that you set up with a U.S. financial institution (such as a bank or an insurance company) in which you can save money exclusively for future medical expenses.

Taxmap/pubs/p969-001.htm#TXMP24153f6f What are the benefits of an Archer MSA?

You may enjoy several benefits from having an Archer MSA.

• You can claim a tax deduction for contributions you make even if you do not itemize your deductions on Form 1040.
• The interest or other earnings on the assets in your Archer MSA are tax free.
• Distributions may be tax free if you pay qualified medical expenses. See Qualified Medical Expenses, later.
• The contributions remain in your Archer MSA from year to year until you use them.
• An Archer MSA is "portable" so it stays with you if you change employers or leave the work force.

Taxmap/pubs/p969-001.htm#TXMP11daa53a Qualifying for an Archer MSA

MSA

To qualify for an Archer MSA, you must be either of the following.

• An employee (or the spouse of an employee) of a small employer (defined later) that maintains an individual or family HDHP for you (or your spouse).
• A self-employed person (or the spouse of a self-employed person) who maintains an individual or family HDHP.

You can have no other health or Medicare coverage except what is permitted under Other health coverage, later. You must be an eligible individual on the first day of a given month to get an Archer MSA deduction for that month.

If another taxpayer is entitled to claim an exemption for you, you cannot claim a deduction for an Archer MSA contribution. This is true even if the other person does not actually claim your exemption.

Taxmap/pubs/p969-001.htm#TXMP2abed39f Small employer.

A small employer is generally an employer who had an average of 50 or fewer employees during either of the last 2 calendar years. The definition of small employer is modified for new employers and growing employers.

Taxmap/pubs/p969-001.htm#TXMP07f18720 Growing employer.

A small employer may begin HDHPs and Archer MSAs for his or her employees and then grow beyond 50 employees. The employer will continue to meet the requirement for small employers if he or she:

• Had 50 or fewer employees when the Archer MSAs began,
• Made a contribution that was excludable or deductible as an Archer MSA for the last year he or she had 50 or fewer employees, and
• Had an average of 200 or fewer employees each year after 1996.

Taxmap/pubs/p969-001.htm#TXMP56173019 Changing employers.

If you change employers, your Archer MSA moves with you. However, you may not make additional contributions unless you are otherwise eligible.

Taxmap/pubs/p969-001.htm#TXMP372e110e High deductible health plan (HDHP).

To be eligible for an Archer MSA, you must have an HDHP. An HDHP has:

• A higher annual deductible than typical health plans, and
• A maximum limit on the annual out-of-pocket medical expenses that you must pay for covered expenses.

Taxmap/pubs/p969-001.htm#TXMP158d6dbd Limits.

The following table shows the limits for annual deductibles and the maximum out-of-pocket expenses for high deductible health plans for 2004.

Type of coverage	Minimum annual deductible	Maximum annual deductible	Maximum annual out-of-pocket expenses
Self-only	$1,700	$2,600	$3,450
Family	$3,450	$5,150	$6,300

Taxmap/pubs/p969-001.htm#TXMP6d356cb8 Family plans that do not meet the high deductible rules.

There are some family plans that have deductibles for both the family as a whole and for individual family members. Under these plans, if you meet the individual deductible for one family member, you do not have to meet the higher annual deductible amount for the family. If either the deductible for the family as a whole or the deductible for an individual family member is below the minimum annual deductible for family coverage, the plan does not qualify as an HDHP.

Taxmap/pubs/p969-001.htm#TXMP0e6cfeca
Example.

You have family health insurance coverage in 2004. The annual deductible for the family plan is $4,500. This plan also has an individual deductible of $2,000 for each family member. The plan does not qualify as an HDHP because the deductible for an individual family member is below the minimum annual deductible ($3,450) for family coverage.

Taxmap/pubs/p969-001.htm#TXMP3783c2e6 Other health coverage.

You (or your spouse if you file jointly) generally cannot have any other health coverage that is not an HDHP. However, you can have additional insurance that provides benefits only for the following items.

• Liabilities from workers' compensation laws, torts, or ownership or use of property.
• A specific disease or illness.
• A fixed amount per day (or other period) of hospitalization.

You can also have coverage (whether provided through insurance or otherwise) for the following items.

• Accidents.
• Disability.
• Dental care.
• Vision care.
• Long-term care.

Taxmap/pubs/p969-001.htm#TXMP64cd134a Contributions to an MSA

Contributions to an MSA

Contributions to an Archer MSA must be made in cash. You cannot contribute stock or other property to an Archer MSA.

Taxmap/pubs/p969-001.htm#TXMP71413172 Who can contribute to my Archer MSA?

If you are an employee, your employer may make contributions to your Archer MSA. (You do not pay tax on these contributions.) If your employer does not make contributions to your Archer MSA, or you are self-employed, you can make your own contributions to your Archer MSA. Both you and your employer cannot make contributions to your Archer MSA in the same year. You do not have to make contributions to your Archer MSA every year.

If your spouse is covered by your HDHP and an excludable amount is contributed by your spouse's employer to an Archer MSA belonging to your spouse, you cannot make contributions to your own Archer MSA that year.

Taxmap/pubs/p969-001.htm#TXMP5740f574 Limits

Limit

There are two limits on the amount you or your employer can contribute to your Archer MSA.

• The annual deductible limit.
• An income limit.

Taxmap/pubs/p969-001.htm#TXMP6df6c29a Annual deductible limit.

You (or your employer) can contribute up to 75% of the annual deductible of your HDHP (65% if you have a self-only plan) to your Archer MSA. You must have the HDHP all year to contribute the full amount. If you do not qualify to contribute the full amount for the year, determine your annual deductible limit by using the worksheet for line 5 in the Form 8853 instructions.

Taxmap/pubs/p969-001.htm#TXMP042e1146
Example 1.

You have an HDHP for your family all year in 2004. The annual deductible is $4,000. You can contribute up to $3,000 ($4,000 × 75%) to your Archer MSA for the year.

Taxmap/pubs/p969-001.htm#TXMP14cef1bc
Example 2.

You have an HDHP for your family for the entire months of July through December, 2004 (6 months). The annual deductible is $4,000. You can contribute up to $1,500 ($4,000 × 75% for 6 months ÷ 12) to your Archer MSA for the year.

If you and your spouse each have a family plan, you are treated as having family coverage with the lower annual deductible of the two health plans. The contribution limit is split equally between you unless you agree on a different division.

Taxmap/pubs/p969-001.htm#TXMP27f86dd9 Income limit.

You cannot contribute more than you earned for the year from the employer through whom you have your HDHP.

If you are self-employed, you cannot contribute more than your net self-employment income. This is your income from self-employment minus expenses (including the one-half of self-employment tax deduction).

Taxmap/pubs/p969-001.htm#TXMP19f74e33
Example 1.

Bob Smith earned $25,000 from ABC Company in 2004. Through ABC, he had an HDHP for his family for the entire year. The annual deductible was $4,000. He can contribute up to $3,000 to his Archer MSA (75% × $4,000). He can contribute the full amount because he earned more than $3,000 at ABC.

Taxmap/pubs/p969-001.htm#TXMP02f9d682
Example 2.

Joe Craft is self-employed. He had an HDHP for his family for the entire year in 2004. The annual deductible was $3,600. Based on the annual deductible, the maximum contribution to his Archer MSA would have been $2,700 (75% × $3,600). However, after deducting his business expenses, Joe's net self-employment income is $1,950 for the year. Therefore, he is limited to a contribution of $1,950.

Taxmap/pubs/p969-001.htm#TXMP03b75fc9 Individuals enrolled in Medicare.

Beginning with the first month you are enrolled in Medicare, you cannot contribute to an Archer MSA. However, you may be eligible for a Medicare Advantage MSA, discussed later.

Taxmap/pubs/p969-001.htm#TXMP3eeef690 When To Contribute

You can make contributions to your Archer MSA for 2004 until April 15, 2005.

Taxmap/pubs/p969-001.htm#TXMP5264a8bc Reporting Contributions on Your Return

Contributions on Your Return

Report all contributions to your Archer MSA on Form 8853 and file it with your Form 1040. You should include all contributions you, or your employer, made for 2004, including those made before April 15, 2005, that are designated for 2004.

You should receive Form 5498-SA, HSA, Archer MSA, or Medicare+Choice MSA Information, from the trustee showing the amount you (or your employer) contributed during the year. Your employer's contributions should be shown in box 12 of Form W-2, Wage and Tax Statement, with code R. Follow the instructions for Form 8853 and complete the worksheet for line 5. Report your Archer MSA deduction on Form 1040, line 35. Identify it as "MSA."

Taxmap/pubs/p969-001.htm#TXMP49120ba2 Excess contributions.

You will have excess contributions if the contributions to your Archer MSA for the year are greater than the limits discussed earlier. Excess contributions are not deductible. Excess contributions made by your employer are included in your gross income. If the excess contribution is not included in box 1 of Form W-2, you must report the excess as "Other income " on your tax return.

Generally, you must pay a 6% excise tax on excess contributions. See Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts, to figure the excise tax.

You may withdraw some or all of the excess contributions and not pay the excise tax on the amount withdrawn if you meet the following conditions.

• You withdraw the excess contributions by the due date, including extensions, of your tax return,
• You withdraw any income earned on the withdrawn contributions and include the earnings in "Other income" on your tax return for the year you withdraw the contributions and earnings.

Taxmap/pubs/p969-001.htm#TXMP03d2db29 Distributions From an MSA

Distributions From an MSA

You will generally pay medical expenses during the year without being reimbursed by your HDHP until you reach the annual deductible for the plan. When you pay medical expenses during the year that are not reimbursed by your HDHP, you can ask the trustee of your Archer MSA to send you a distribution from your Archer MSA.

You can receive tax-free distributions from your Archer MSA to pay for qualified medical expenses (discussed later). If you receive distributions for other reasons, the amount will be subject to income tax and may be subject to an excise tax as well. You do not have to make withdrawals from your Archer MSA each year.

If you no longer qualify to make contributions, you can still receive tax-free distributions to pay or reimburse your qualified medical expenses.

A distribution is money you get from your Archer MSA. The trustee will report any distribution to you and the IRS on Form 1099-SA, Distributions From an HSA, Archer MSA, or Medicare+Choice MSA.

Taxmap/pubs/p969-001.htm#TXMP73204aee Qualified medical expenses.

Qualified medical expenses are those expenses that would generally qualify for the medical and dental expenses deduction. These are explained in Publication 502, Medical and Dental Expenses. Examples include amounts paid for doctors' fees, prescription and non-prescription medicines, and necessary hospital services not paid for by insurance. Qualified medical expenses are those incurred by you, your spouse, and your dependents.

You cannot deduct qualified medical expenses as an itemized deduction on Schedule A (Form 1040) that are equal to the tax-free distribution from your Archer MSA. This is the amount on line 9 of Form 8853.

Taxmap/pubs/p969-001.htm#TXMP491149e2 Special rules for insurance premiums.

Generally, you cannot treat insurance premiums as qualified medical expenses for Archer MSAs. You can, however, treat premiums for long-term care coverage, health care coverage while you receive unemployment benefits, or health care continuation coverage required under any federal law as qualified medical expenses for Archer MSAs.

Taxmap/pubs/p969-001.htm#TXMP0e33cd8e Health coverage tax credit.

You cannot claim this credit for premiums that you pay with a tax-free distribution from your Archer MSA. See Publication 502 for information on this credit.

Taxmap/pubs/p969-001.htm#TXMP76898407 Deemed distributions from MSAs.

The following situations result in deemed taxable distributions from your MSA.

• You engaged in any transaction prohibited by section 4975 with respect to any of your MSAs, at any time in 2004. Your account ceases to be an MSA as of January 1, 2004, and you must include the fair market value of all assets in the account as of January 1, 2004, on line 8a of Form 8853.
• You used any portion of any of your MSAs as security for a loan at any time in 2004. You must include the fair market value of the assets used as security for the loan as income on Form 1040, line 21.

Recordkeeping. You must keep records sufficient to later show that: The distributions were exclusively to pay or reimburse qualified medical expenses, The qualified medical expenses had not been previously paid or reimbursed from another source, and The medical expenses had not been taken as an itemized deduction in any year. Do not send these records with your tax return. Keep them with your tax records.

Taxmap/pubs/p969-001.htm#TXMP5ca2ba3e Reporting Distributions on Your Return

Reporting Distributions on Your Return

How you report your distributions depends on whether or not you use the distribution for qualified medical expenses (defined later).

• If you use a distribution from your Archer MSA for qualified medical expenses, you do not pay tax on the distribution but you have to report the distribution on Form 8853. Follow the instructions for the form and file it with your Form 1040.
• If you do not use a distribution from your Archer MSA for qualified medical expenses, you must pay tax on the distribution. Report the amount on Form 8853 and file it with your Form 1040. If you have a taxable Archer MSA distribution, include it in the total on Form 1040, line 21, and enter "MSA" and the amount on the dotted line next to line 21. You may have to pay an additional tax on your taxable distribution.

If an amount (other than a rollover) is contributed to your Archer MSA this year (by you or your employer), you also must report and pay tax on a distribution you receive from your Archer MSA this year that is used to pay medical expenses of someone who is not covered by an HDHP, or is also covered by another health plan that is not an HDHP, at the time the expenses are incurred. See the instructions for Form 8853 for more information.

Taxmap/pubs/p969-001.htm#TXMP00d6d0a6 Rollovers.

Generally, any distribution from an Archer MSA that you roll over into another Archer MSA or an HSA is not taxable if you complete the rollover within 60 days. You can make only one rollover contribution to an Archer MSA during a 1-year period. See the instructions for From 8853 for more information.

Taxmap/pubs/p969-001.htm#TXMP11691830 Additional tax.

There is a 15% additional tax on the part of your distributions not used for qualified medical expenses. Figure the tax on Form 8853 and file it with your Form 1040. Report the additional tax on Form 1040, line 62, and enter "MSA" and the amount on the dotted line next to line 62.

Taxmap/pubs/p969-001.htm#TXMP23c64488 Exceptions.

There is no additional tax on distributions made after the date you are disabled, reach age 65, or die.

Taxmap/pubs/p969-001.htm#TXMP13545b60 Balance in an MSA

Balance in an MSA

An MSA is generally exempt from tax. You are permitted to take a distribution from your Archer MSA at any time; however, only those amounts used exclusively to pay for qualified medical expenses are tax free. Amounts that remain at the end of the year are generally carried over to the next year (see Excess contributions, earlier). Earnings on amounts in an MSA are not included in your income while held in the MSA.

Taxmap/pubs/p969-001.htm#TXMP50bccb22 Death of the Archer MSA Holder

Death of the Archer MSA Holder

You should choose a beneficiary when you set up your Archer MSA. What happens to that Archer MSA when you die depends on whom you designate as the beneficiary.

Taxmap/pubs/p969-001.htm#TXMP4415f2f7 Spouse is the designated beneficiary.

If your spouse is the designated beneficiary of your Archer MSA, it will be treated as your spouse's Archer MSA after your death.

Taxmap/pubs/p969-001.htm#TXMP25ae5860 Spouse is not the designated beneficiary.

If your spouse is not the designated beneficiary of your Archer MSA:

• The account stops being an Archer MSA, and
• The fair market value of the Archer MSA becomes taxable to the beneficiary in the year in which you die.

If your estate is the beneficiary, the fair market value of the Archer MSA will be included on your final income tax return.

The amount taxable to a beneficiary other than the estate is reduced by any qualified medical expenses for the decedent that are paid by the beneficiary within 1 year after the date of death.

Taxmap/pubs/p969-001.htm#TXMP7808ba1b Filing Form 8853

F8853

You must file Form 8853 with your Form 1040 if you (or your spouse, if married filing a joint return) had any activity in your Archer MSA during the year. You must file the form even if only your employer or your spouse's employer made contributions to the Archer MSA.

Taxmap/pubs/p969-001.htm#TXMP27f98010 Employer Participation

Employer Participation

This section contains the rules that employers must follow if they decide to make Archer MSAs available to their employees. Unlike the previous discussions, "you" refers to the employer and not to the employee.

Taxmap/pubs/p969-001.htm#TXMP6339fc0e Health plan.

If you want your employees to be able to have an Archer MSA, you must make an HDHP available to them. You can provide no additional coverage other than those exceptions listed previously under Other health coverage.

Taxmap/pubs/p969-001.htm#TXMP79e75b29 Contributions.

You can make contributions to your employees' Archer MSAs. You deduct the contributions on the "Employee benefit programs" line of your business income tax return for the year in which you make the contributions. If you are filing Form 1040, Schedule C, this is Part II, line 14.

Taxmap/pubs/p969-001.htm#TXMP50ae00e9 Comparable contributions.

If you decide to make contributions, you must make comparable contributions to all comparable participating employees' Archer MSAs. Your contributions are comparable if they are either:

• The same amount, or
• The same percentage of the annual deductible limit under the HDHP covering the employees.

Taxmap/pubs/p969-001.htm#TXMP2ad975e1 Comparable participating employees.

Comparable participating employees:

• Are covered by your HDHP and are eligible to establish an Archer MSA,
• Have the same category of coverage (either self-only or family coverage), and
• Have the same category of employment (either part-time or full-time).

Taxmap/pubs/p969-001.htm#TXMP5fe4e0dc Excise tax.

If you made contributions to your employees' Archer MSAs that were not comparable, you must pay an excise tax of 35% of the amount you contributed.

Taxmap/pubs/p969-001.htm#TXMP475f5d1d Employment taxes.

Amounts you contribute to your employees' Archer MSAs are generally not subject to employment taxes. You must report the contributions in box 12 of the Form W-2 you file for each employee during the calendar year. Enter code "R" in box 12.

Taxmap/pubs/p969-001.htm#TXMP4dc42ea1 Medicare Advantage MSAs

Medicare Advantage MSAs

A Medicare Advantage MSA is an Archer MSA designated by Medicare to be used solely to pay the qualified medical expenses of the account holder. To be eligible for a Medicare Advantage MSA, you must be enrolled in Medicare and have a high deductible health plan (HDHP) that meets the Medicare guidelines.

A Medicare Advantage MSA is a tax-exempt trust or custodial savings account that you set up with a financial institution (such as a bank or an insurance company) in which the Medicare program can deposit money for qualified medical expenses. The money in your account is not taxed if it is used for qualified medical expenses, and it may earn interest or dividends.

An HDHP is a special health insurance policy that has a high deductible. You choose the policy you want to use as part of your Medicare Advantage MSA plan. However, the policy must be approved by the Medicare program.