Publication 969: Medical Savings Accounts (MSAs); Publication 969 Main Contents

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Archer MSAs

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. This account must be used in conjunction with a high deductible health plan (HDHP), discussed later.

What are the benefits of an Archer MSA?

You may enjoy several benefits from having an Archer MSA.

The interest or other earnings on the assets in your Archer MSA are tax free.
You can claim a tax deduction for contributions you make even if you do not itemize your deductions on Form 1040.
Distributions may be tax-free if you pay qualified medical expenses. See Receiving Distributions, 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.

Qualifying for an Archer 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 insurance or Medicare coverage except what is permitted under Other health insurance, 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.

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.

New employer.

A new employer is also considered a small employer for Archer MSAs if he or she reasonably expects to employ 50 or fewer people this year.

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.

Changing employers.

If you change employers and still meet the rules for having an Archer MSA, you can continue to use that Archer MSA. However, you may not make additional contributions unless you are otherwise eligible.

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.

Limits.

The following table shows the limits for annual deductibles and the maximum out-of-pocket expenses for high deductible health plans for 2003.

Type of coverage	Minimum annual deductible	Maximum annual deductible	Maximum annual out-of-pocket expenses
Self-only	$1,700	$2,500	$3,350
Family	$3,350	$5,050	$6,150

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 that year, the plan does not qualify as an HDHP.

Example.

Mr. Wilber has health insurance with company A in 2003. The annual deductible for the family plan is $4,500. This plan also has an individual deductible of $1,800 for each family member. Mr. Wilber's wife had $2,200 of covered medical expenses. They had no other medical expenses for 2003. The plan paid $400 to Mr. Wilber because Mrs. Wilber met the individual deductible of $1,800, even though the Wilbers did not meet the $4,500 annual deductible for the family plan. The plan does not qualify as an HDHP.

Other health insurance.

You (or your spouse if you file jointly) 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.

When you set up an Archer MSA, you will need to work with a trustee. No permission or authorization from the IRS is necessary to establish an Archer MSA.

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

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

Annual deductible limit.

You (or your employer) can contribute up to 75% of the amount of your annual health plan deductible (65% if you have a self-only plan) to your Archer MSA. You must have the insurance all year to contribute the full amount.

For each full month you did not have an HDHP, you must reduce the amount you can contribute by one-twelfth.

Example 1.

You have an HDHP for your family all year in 2003. The annual deductible is $4,000. You can contribute up to $3,000 ($4,000 × 75%) to your Archer MSA for the year.

Example 2.

You have an HDHP for your family for the entire months of July through December, 2003 (6 months). The annual deductible is $4,000. You can contribute up to $1,500 ($4,000 × 75% ÷ 12 months × 6 months) 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.

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).

Example 1.

Bob Smith earned $25,000 from ABC Company in 2003. He had an HDHP for his family at ABC 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.

Example 2.

Joe Craft is self-employed. He had an HDHP for his family for the entire year in 2003. The annual deductible was $3,500. Based on the annual deductible, the maximum contribution to his Archer MSA would have been $2,625 (75% × $3,500). 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.

Report all contributions to your Archer MSA on Form 8853 and attach it to your Form 1040. You should include all contributions you, or your employer, made for 2003, including those made before April 15, 2004, that are designated for 2003.

You should receive Form 5498–MSA, 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 Line 5 Limitation Worksheet. Report your Archer MSA deduction on Form 1040, line 33. Identify it as “MSA.”

You can make tax-free withdrawals from your Archer 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 excise tax as well. You do not have to make withdrawals from your Archer MSA each year.

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.

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

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 for 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.

Qualified medical expenses are those that 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 medicines, and necessary hospital services not paid for by insurance.

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

Recordkeeping. For each qualified medical expense you deduct as an itemized deduction on Schedule A or pay with a distribution from your Archer 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.

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

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.

A Medicare+Choice 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+Choice MSA, you must be eligible for Medicare and have a high deductible health plan (HDHP) that meets the Medicare guidelines.

A Medicare+Choice 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+Choice MSA plan. However, the policy must be approved by the Medicare program.

Medicare+Choice MSAs are administered through the Federal Medicare program. You can get information by calling 1–800–Medicare (1–800–633–4227) or through the Internet at www.medicare.gov.

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Publication 969Main Contents

Note.

Publication 969
Main Contents