Publication 969 |
2000 Tax Year |
Medicare+Choice Medical Savings Accounts (M+C MSAs)
To qualify for a Medicare+Choice Medical Savings Account
(M+C MSA), you must be eligible for Medicare and have a high
deductible health plan (HDHP) that meets the Medicare guidelines
outlined below. If you have additional health insurance coverage that
would cover your deductible, you cannot keep the additional coverage
and still enroll in an M+C MSA plan.
M+C MSAs are administered through the Federal Medicare
program. The Health Care Financing Administration (HCFA) has more
information about this program. You can get this information by
calling 1-800-318-2596. You can also reach HCFA
through the Internet at www.medicare.gov.
Understanding M+C MSAs
To understand M+C MSAs, you will want to know what an M+C
MSA is and what the benefits are of having one. You will also need to
know whether you meet the rules for starting an M+C MSA. If you
meet the rules, then you may want to read the section titled
Setting Up the M+C MSA.
What is an M+C MSA?
An M+C MSA has two parts. One part is a tax-exempt trust or
custodial savings account that you set up with a financial institution
(like 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.
In an M+C MSA plan, qualified medical expenses do not include
amounts paid for medical care for any individual other than the
account holder.
The other part of an M+C MSA is an M+C MSA Health Policy.
This is a special health insurance policy that has a high deductible.
See M+C MSA High Deductible Health Plan (M+C MSA
HDHP), later.
What are the benefits of an M+C MSA?
You may enjoy several benefits from having an M+C MSA.
- The Medicare program, not you, makes a tax-free deposit to
your account each year.
- The Medicare program, not you, pays a monthly premium to the
insurance company for your policy.
- The interest or other earnings on the assets in your
M+C MSA are tax-free.
- The contributions remain in your M+C MSA account from
year to year until they are used regardless of whether you are still
enrolled in the program.
Example.
In 1999, Jane chooses an M+C MSA plan and sets up an account.
With this plan, Jane receives a $1,200 yearly deposit from the
Medicare program into her account. This amount is deposited into her
account on January 1, 2000. During 2000, Jane has a routine check-up,
dental check-ups, and fills her regular prescriptions (benefits not
covered by the original Medicare plan). She pays for these services by
using $300 of the $1,200 which the Medicare program had deposited into
her account. At the end of the year, Jane still has $900 in her
account. On January 1, 2001, another $1,200 deposit is made to her
account by the Medicare program. Now Jane has $2,100 (plus any
interest earned) in her account for medical expenses.
Rules for Starting an M+C MSA
You need to meet the following conditions before you can start an
M+C MSA.
- You must be eligible for Medicare.
- You must have an M+C MSA HDHP which is approved by
Medicare.
- You must have an account set up with a bank or other
institution which is registered with the Medicare program to set up
M+C MSA accounts.
Call 1-800-318-2596 for a list of insurers and
their phone numbers, or look for this information on the Internet at
www.medicare.gov.
M+C MSA High Deductible Health Plan (M+C MSA HDHP).
To be eligible for an M+C MSA, you must have an M+C MSA
HDHP. You generally cannot have another health insurance plan. You
choose the policy you want to use as part of your M+C MSA plan.
However, the policy must have been approved by the Medicare program.
Definition.
An M+C MSA HDHP:
- Has a higher annual deductible than typical health plans,
and
- Must have been designed to work as part of an M+C MSA
plan.
In 1999 and 2000, the annual deductible for the policy cannot
exceed $6,000 and $6,300 respectively.
Other health insurance.
An M+C MSA account holder generally cannot have any other
health plan that is not an HDHP. However, this rule does not apply if
the other health plan(s) only covers the following items.
- Accidents.
- Disability.
- Dental care.
- Vision care.
- Long-term care.
- Benefits related to workers' compensation laws, tort
liabilities, or ownership or use of property.
- A specific disease or illness.
- A fixed amount per day (or other period) of
hospitalization.
Setting Up the M+C MSA
When you set up an M+C MSA, you choose the bank or other
institution where the account will be. The organization you choose
will be the trustee or custodian of your account. The bank or
institution must be registered with the Medicare program to set up
M+C MSAs. The trustee can be a bank, insurance company, or anyone
already approved by the IRS to be a trustee of individual retirement
arrangements.
You choose the insurance policy you want to use as part of your
M+C MSA plan. This policy must have been approved by the Medicare
program. The policy is offered to you by an insurance company and it
must be designed to work as part of an M+C MSA plan. It must have
a high annual deductible which cannot be more than $6,000 in 1999 or
$6,300 in 2000. Every month, the Medicare program (not you) pays the
premium for your policy directly to the insurance company.
Who can contribute to my M+C MSA?
At the beginning of the year, the Secretary of Health and Human
Services, through the Medicare program, makes a deposit to your
account for the entire year. See Making Contributions to an
M+C MSA, later.
How can I make withdrawals from my M+C MSA?
You can make tax-free withdrawals from your M+C MSA to pay
for qualified medical expenses (discussed later). If you make
withdrawals for other reasons, the amount you withdraw will be subject
to income tax and may be subject to an additional penalty tax as well.
See Receiving Distributions from an M+C MSA, later.
You do not have to make withdrawals from an M+C MSA each year.
Making Contributions to
an M+C MSA
The amount of the annual tax-free deposit made by the Medicare
program to your M+C MSA will depend on the policy that you select
and the area in which you live. The deposit may also vary depending on
the services your policy covers. Each insurance company that offers a
policy will tell you the exact amount of the deposit you will receive.
If you should set up an M+C MSA with one trustee and then
later set up another M+C MSA with a different trustee, you can
have the assets transferred from one account to the other without
becoming liable for taxes. However, the transfer must be made only by
the trustees and only between your own M+C MSAs.
Are there any limits to contributions?
Only the Secretary of Health and Human Resources, through the
Medicare program, can make deposits to your M+C MSA. The
appropriate deposit will be made in one lump sum at the beginning of
the year.
Note.
If a mistake is made and too much money is deposited into your
M+C MSA, the excess contribution can be returned to the Secretary
of Health and Human Resources (along with any interest or dividends
earned on the overpaid amount) without you having to pay any extra tax
or penalty on that amount.
Receiving Distributions from
an M+C MSA
You will generally pay medical expenses during the year without
being reimbursed by your HDHP until you reach the annual deductible.
When you pay medical expenses during the year that are not reimbursed
by your HDHP, you can ask the trustee of your M+C MSA to send you
a distribution from your M+C MSA.
A distribution is money you get from your M+C MSA. The trustee
will report any distribution to you and the IRS on Form
1099-MSA, Distributions From Medical Savings
Accounts.
How to report distributions on your tax return.
How you report your distributions depends on whether or not you use
the distribution for qualified medical expenses, defined
later.
- When you use a distribution from your M+C MSA for
qualified medical expenses, you do not pay tax on the distribution.
Report distributions on Form 8853, Section B. Follow the instructions
for the form and attach it to your Form 1040. You cannot file Form
1040A or Form 1040EZ.
- When you do not use a distribution from your M+C MSA
for qualified medical expenses, you must pay tax on the distribution
and report the amount on Form 8853, Section B. Follow the instructions
for the form and attach it to your Form 1040.
Note.
If you are married filing jointly and both you and your spouse
received distributions from an M+C MSA, attach a separate Section
B of Form 8853 for each spouse. Get Instructions for Form
8853.
Reporting and paying the 50% penalty tax.
You may have to pay a 50% penalty tax on the part of your
distributions not used for qualified medical expenses. You report the
penalty tax on your Form 1040 unless you meet one of the following
exceptions.
Exceptions to the 50% penalty tax.
There is no 50% penalty tax if you are disabled or die during the
year.
Figuring the M+C MSA 50% penalty tax.
Refer to Section B -- Medicare + Choice MSA
Distributions in the Instructions for Form 8853 to
figure whether you owe the 50% penalty tax and how much the 50%
penalty tax is if you do owe it. Since the penalty computation method
may vary depending on which year you are reporting distributions for,
be sure to use the instructions for the specific year in which the
distributions were made.
Death of the M+C MSA holder.
What happens to your M+C MSA when you die depends on whom you
designate as the beneficiary.
When your spouse is the designated beneficiary.
If your spouse is the designated beneficiary of your M+C MSA,
it will be treated as your spouse's MSA after your death. However, no
further contributions will be made by the Secretary of Health and
Human Resources and distributions will be subject to the rules of
regular MSAs, not M+C MSAs.
When your spouse is not the designated beneficiary.
If someone other than your spouse is the designated beneficiary of
your M+C MSA on the date you die, then:
- The account stops being an M+C MSA, and
- The fair market value of the M+C MSA becomes taxable to
the designated beneficiary.
When you do not name a designated beneficiary.
If you do not name a designated beneficiary of your M+C MSA,
the fair market value of the MSA will be included on your final income
tax return after your death.
Qualified Medical Expenses
Qualified medical expenses are explained in Publication 502.
Examples include amounts paid for doctors' fees, prescription
medicines, and necessary hospital services.
You cannot deduct qualified medical expenses as an itemized
deduction on Schedule A (Form 1040) if you pay for them with a
tax-free distribution from your M+C MSA. You also cannot claim a
deduction if you use other funds equal to the amount of the
distribution.
Special rules for insurance premiums.
Generally, you cannot treat insurance premiums as qualified medical
expenses for M+C MSAs. You can, however, treat premiums for
long-term care or health care coverage while you receive unemployment
benefits as qualified medical expenses for M+C MSAs. This
includes COBRA-type continuation coverage required under any Federal
law.
Recordkeeping. For each qualified medical expense you
deduct or pay with a distribution from your M+C MSA, you must
keep a record of the name and address of each person you paid and the
amount and date of the payment. Do not send these records with your
tax return. Keep them with your tax records.
Filing Form 8853
You must file Form 8853 and attach it to Form 1040 if you (or your
spouse, if married filing a joint return) received distributions from
an M+C MSA during the year. If both you and your spouse received
distributions from an M+C MSA, attach a separate Section B of
Form 8853 for each spouse. For more information, see the
Instructions for Form 8853.
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