Publication 969 (2006), Health Savings Accounts and Other Tax-Favored Health Plans

Publication 969 - Main Contents

This is archived information that pertains only to the 2006 Tax Year. If you
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Table of Contents

Health Savings Accounts (HSAs)

A health savings account (HSA) is a tax-exempt trust or custodial account that you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. You must be an eligible individual to qualify for an HSA.

No permission or authorization from the IRS is necessary to establish an HSA. When you set up an HSA, you will need to work with a trustee. A qualified HSA trustee can be a bank, an insurance company, or anyone already approved by the IRS to be a trustee of individual retirement arrangements (IRAs) or Archer MSAs. The HSA can be established through a trustee that is different from your health plan provider.

Your employer may already have some information on HSA trustees in your area.

If you have an Archer MSA, you can generally roll it over into an HSA tax free. See Rollovers, later.

What are the benefits of an HSA? You may enjoy several benefits from having an HSA.

You can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you do not itemize your deductions on Form 1040.
Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income.
The contributions remain in your account from year to year until you use them.
The interest or other earnings on the assets in the account are tax free.
Distributions may be tax free if you pay qualified medical expenses. See Qualified medical expenses, later.
An HSA is “portable” so it stays with you if you change employers or leave the work force.

Qualifying for an HSA

To be an eligible individual and qualify for an HSA, you must meet the following requirements.

You have a high deductible health plan (HDHP), described later, on the first day of the month.
You have no other health coverage except what is permitted under Other health coverage, later.
You are not enrolled in Medicare.
You cannot be claimed as a dependent on someone else's 2006 tax return.

If you meet these requirements, you are an eligible individual even if your spouse has non-HDHP family coverage, provided your spouse's coverage does not cover you.

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

Each spouse who is an eligible individual who wants an HSA must open a separate HSA. You cannot have a joint HSA.

High deductible health plan (HDHP). An HDHP has:

A higher annual deductible than typical health plans, and
A maximum limit on the sum of the annual deductible and out-of-pocket medical expenses that you must pay for covered expenses. Out-of-pocket expenses include copayments and other amounts, but do not include premiums.

An HDHP may provide preventive care benefits without a deductible or with a deductible below the minimum annual deductible. Preventive care includes, but is not limited to the following.

Periodic health evaluations, including tests and diagnostic procedures ordered in connection with routine examinations, such as annual physicals.
Routine prenatal and well-child care.
Child and adult immunizations.
Tobacco cessation programs.
Obesity weight-loss programs.
Screening services. This includes screening services for the following.
1. Cancer.
2. Heart and vascular diseases.
3. Infectious diseases.
4. Mental health conditions.
5. Substance abuse.
6. Metabolic, nutritional, and endocrine conditions.
7. Musculoskeletal disorders.
8. Obstetric and gynecological conditions.
9. Pediatric conditions.
10. Vision and hearing disorders.
For more information on screening services, see Notice 2004-23, which is on page 725 of Internal Revenue Bulletin 2004-15 at
www.irs.gov/pub/irs-irbs/irb04-15.pdf.

The following table shows the minimum annual deductible and maximum annual deductible and other out-of-pocket expenses for HDHPs for 2006.

Type of Coverage	Minimum Annual Deductible	Maximum Annual Deductible and Other Out-of-Pocket Expenses *
Self-only	$1,050	$5,250
Family	$2,100	$10,500

* This limit does not apply to deductibles and expenses for out-of-network services if the plan uses a network of providers. Instead, only deductibles and out-of-pocket expenses for services within the network should be used to figure whether the limit applies.

Self-only HDHP coverage is an HDHP covering only an eligible individual. Family HDHP coverage is an HDHP covering an eligible individual and at least one other individual (whether or not that individual is an eligible individual).

Example.

An eligible individual and his dependent child are covered under an “employee plus one” HDHP offered by the individual's employer. This is family HDHP coverage.

State requirements. Generally, if your state requires a health plan to provide certain benefits without a deductible or at a deductible that is less than the minimum annual deductible, the plan may not be an HDHP. However, for non-calendar year health plans, a plan that would otherwise qualify except that on its most recent renewal date before January 1, 2006, it complied with state law in effect on January 1, 2004, will be treated as an HDHP. This relief only applies to a coverage period of 12 months or less that began before January 1, 2006.

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.

Example.

You have family health insurance coverage in 2006. The annual deductible for the family plan is $3,500. This plan also has an individual deductible of $1,500 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 ($2,100) for family coverage.

Other health coverage. You (and your spouse, if you have family coverage) generally cannot have any other health coverage that is not an HDHP. However, you can still be an eligible individual even if your spouse has non-HDHP coverage provided you are not covered by that plan. However, you can have additional insurance that provides benefits only for the following items.

Liabilities incurred under workers' compensation laws, tort liabilities, or liabilities related to 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.

Plans in which substantially all of the coverage is through the above listed items are not HDHPs. For example, if your plan provides coverage substantially all of which is for a specific disease or illness, the plan is not an HDHP for purposes of establishing an HSA.

Prescription drug plans. You can have a prescription drug plan, either as part of your HDHP or a separate plan (or rider), and qualify as an eligible individual if the plan does not provide benefits until the minimum annual deductible of the HDHP has been met. If you can receive benefits before that deductible is met, you are not an eligible individual.

Other employee health plans. An employee covered by an HDHP and a health FSA or an HRA that pays or reimburses qualified medical expenses generally cannot make contributions to an HSA. Health FSAs and HRAs are discussed later.

However, an employee can make contributions to an HSA while covered under an HDHP and one or more of the following arrangements.

Limited-purpose health FSA or HRA. These arrangements can pay or reimburse the items listed earlier under Other health coverage, except long-term care. Also, these arrangements can pay or reimburse preventive care expenses because they can be paid without having to satisfy the deductible.
Suspended HRA. Before the beginning of an HRA coverage period, you can elect to suspend the HRA. The HRA does not pay or reimburse, at any time, the medical expenses incurred during the suspension period except preventive care and items listed under Other health coverage. When the suspension period ends, you are no longer eligible to make contributions to an HSA.
Post-deductible health FSA or HRA. These arrangements do not pay or reimburse any medical expenses incurred before the minimum annual deductible amount is met. The deductible for these arrangements does not have to be the same as the deductible for the HDHP, but benefits may not be provided before the minimum annual deductible amount is met.
Retirement HRA. This arrangement pays or reimburses only those medical expenses incurred after retirement. After retirement you are no longer eligible to make contributions to an HSA.

Contributions to an HSA

Any eligible individual can contribute to an HSA. For an employee's HSA, the employee, the employee's employer, or both may contribute to the employee's HSA in the same year. For an HSA established by a self-employed (or unemployed) individual, the individual can contribute. Family members or any other person may also make contributions on behalf of an eligible individual.

Contributions to an HSA must be made in cash. Contributions of stock or property are not allowed.

Limit on contributions. The amount you or any other person can contribute to your HSA depends on the type of HDHP coverage you have and your age. For 2006, if you have self-only coverage, you can contribute up to the amount of your annual health plan deductible, but not more than $2,700. If you have family coverage, you can contribute up to the amount of your annual health plan deductible, but not more than $5,450. See Rules for married people (discussed later).

For 2006, you must be an eligible individual and have the same coverage all year to contribute the full amount. If you do not qualify to contribute the full amount for the year, determine your contribution limit by using the worksheet for line 3 in the Form 8889 instructions.

Example 1.

In 2006, you have an HDHP for your family for the entire months of July through December (6 months). The annual deductible of your HDHP is $4,000. You are under age 55. On the worksheet for line 3 in the Form 8889 instructions, you show $4,000 for each month (July - December) that you are an eligible individual. You divide the total of those amounts ($24,000) by 12 to determine your contribution limit ($2,000) for the year.

Example 2.

For 2006, you are an eligible individual with self-only HDHP coverage. Your annual deductible is $1,200. You get married in March and beginning April 1, 2006, you and your spouse have family HDHP coverage with a $2,400 deductible. Both of you are under age 55. Your spouse is not an eligible individual. On the worksheet for line 3, you would show $1,200 for the first 3 months and $2,400 for the last 9 months. You divide the total of those amounts ($25,200) by 12 to determine your contribution limit ($2,100) for the year.

If your spouse became an eligible individual during 2006, you would have to allocate the deductible for the family HDHP coverage for the period you were both eligible individuals equally between you and your spouse unless you agree on a different allocation, including allocating nothing to one spouse. You would not allocate the self-only deductible between you and your spouse.

Additional contribution. For 2006, if you are an eligible individual who is age 55 or older, your contribution limit is increased by $700. For example, if you have self-only coverage, you can contribute up to the amount of your annual health plan deductible plus $700, but not more than $3,400. However, see Enrolled in Medicare, later.

Example.

In 2006, you have an HDHP for your family for the entire months of July through December. The annual deductible of the HDHP is $4,000. You reach age 55 on September 5, 2006. On the worksheet for line 3, you would show $4,700 for 6 months (July through December). You divide this total ($28,200) by 12 to determine your contribution limit ($2,350) for the year.

For 2007, the additional contribution amount is $800.

If you have more than one HSA in 2006, your total contributions to all the HSAs cannot be more than the limits discussed earlier.

Reduction of contribution limit. You must reduce the amount that can be contributed (including any additional contribution) to your HSA by the amount of any contribution made to your Archer MSA (including employer contributions) for the year. A special rule applies to married people, discussed next, if each spouse has family coverage under an HDHP.

You must reduce the amount you, or any other person, can contribute to your HSA by the amount of any contributions made by your employer that are excludable from your income. This includes amounts contributed to your account by your employer through a cafeteria plan.

Rules for married people. If either spouse has family coverage, both spouses are treated as having family coverage. If each spouse has family coverage under a separate plan, both are treated as having family coverage under the plan with the lower annual deductible. You must reduce the limit on contributions, before taking into account any additional contributions, by the amount contributed to both spouse's Archer MSAs. After that reduction, the contribution limit is split equally between the spouses unless you agree on a different division.

The rules for married people apply only if both spouses are eligible individuals.

If both spouses are 55 or older and not enrolled in Medicare, each spouse's contribution limit is increased by the additional contribution. If both spouses meet the age requirement, the total contributions under family coverage cannot be more than $6,850.

Example.

For 2006, Mr. Auburn and his wife are both eligible individuals. They each have family coverage under separate HDHPs. Mr. Auburn is 58 years old and Mrs. Auburn is 53. Mr. Auburn has a $3,000 deductible under his HDHP and Mrs. Auburn has a $2,100 deductible under her HDHP. Mr. and Mrs. Auburn are both treated as being covered under the HDHP with the $2,100 deductible. Mr. Auburn can contribute $1,750 to an HSA (one-half the $2,100 deductible + $700 additional contribution) and Mrs. Auburn can contribute $1,050 to an HSA (unless Mr. and Mrs. Auburn agree to a different division for the year).

Family coverage with embedded deductible. An HDHP with family coverage may have deductibles for both the family as a whole (the umbrella deductible) and for individual family members (the embedded deductible). In this situation your limit on contributions is the least of the following amounts.

The maximum annual contribution limit for family coverage ($5,450 for 2006).
The umbrella deductible.
The embedded deductible multiplied by the number of family members covered by the plan.

Example 1.

For 2006, you have an HDHP with family coverage for you, your spouse, and two dependent children. The HDHP will pay benefits for any family members whose covered expenses exceed $2,100 (the embedded deductible) and will pay benefits for all family members after the family's covered expenses exceed $5,000 (the umbrella deductible). The maximum annual contribution limit is $5,000 (the least of $5,450, $5,000, or $8,400 ($2,100 x 4)).

Example 2.

Use the same facts as in Example 1, except the HDHP provides coverage only for you and your spouse. The maximum annual contribution limit is $4,200 (the least of $5,450, $5,000, or $4,200 ($2,100 x 2)).

A plan will not qualify as an HDHP if either the umbrella deductible or the embedded deductible is less than the minimum annual deductible ($2,100) for family coverage. If there is no umbrella deductible, the deductible for each family member multiplied by the number of family members cannot exceed the maximum annual deductible and other out-of-pocket expenses ($10,500) for family coverage.

Enrolled in Medicare. Beginning with the first month you are enrolled in Medicare, you cannot contribute to your HSA.

Example.

You turned age 65 in July 2006 and enrolled in Medicare. You had self-only coverage under an HDHP with an annual deductible of $1,100. You are eligible for an additional contribution of $700. Your contribution limit is $900 ($1,800 ÷12 × 6). You can make contributions for January through June totaling $900, but cannot make any contributions for July through December.

Rollovers. You can roll over amounts from Archer MSAs and other HSAs into an HSA. Rollover contributions do not need to be in cash. Rollovers are not subject to the annual contribution limits.

You must roll over the amount within 60 days after the date of receipt. You can make only one rollover contribution to an HSA during a 1-year period. You cannot roll over amounts from an IRA, an HRA, or a health FSA into an HSA.

If you instruct the trustee of your HSA to transfer funds directly to the trustee of another HSA, the transfer is not considered a rollover. There is no limit on the number of these transfers. Do not include the amount transferred in income, deduct it as a contribution, or include it as a distribution on Form 8889, line 12a.

When To Contribute

You can make contributions to your HSA for 2006 until April 17, 2007.

Reporting Contributions on Your Return

Contributions made by your employer are not included in your income. Contributions to an employee's account by an employer using the amount of an employee's salary reduction through a cafeteria plan are treated as employer contributions. You can claim contributions you made and contributions made by any other person, other than your employer, on your behalf, as an adjustment to income.

Contributions by a partnership to a bona fide partner's HSA are not contributions by an employer. The contributions are treated as a distribution of money and are not included in the partner's gross income. Contributions by a partnership to a partner's HSA for services rendered are treated as guaranteed payments that are deductible by the partnership and includible in the partner's gross income. In both situations, the partner can deduct the contribution made to the partner's HSA.

Contributions by an S corporation to a 2% shareholder-employee's HSA for services rendered are treated as guaranteed payments and are deductible by the S corporation and includible in the shareholder-employee's gross income. The shareholder-employee can deduct the contribution made to the shareholder-employee's HSA.

Form 8889. Report all contributions to your HSA on Form 8889, Health Savings Accounts (HSAs), and file it with your Form 1040. You should include all contributions made for 2006, including those made by April 17, 2007, that are designated for 2006. Contributions made by your employer are also shown on the form.

You should receive Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information, from the trustee showing the amount contributed to your HSA during the year. Your employer's contributions also will be shown in box 12 of Form W-2, Wage and Tax Statement, with code W. Follow the instructions for Form 8889. Report your HSA deduction on Form 1040, line 25.

Excess contributions. You will have excess contributions if the contributions to your HSA 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. The excise tax applies to each tax year the excess contribution remains in the account.

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 for the year the contributions were made.
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.

Distributions From an HSA

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 HSA to send you a distribution from your HSA.

You can receive tax-free distributions from your HSA to pay or be reimbursed for qualified medical expenses you incur after you establish the HSA. If you receive distributions for other reasons, the amount you withdraw will be subject to income tax and may be subject to an additional 10% tax. You do not have to make distributions from your HSA each year.

If you are no longer an eligible individual, you can still receive tax-free distributions to pay or reimburse your qualified medical expenses.

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

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 the following persons.

Yourself and your spouse.
All dependents you claim on your tax return.
Any person you could have claimed as a dependent on your return except that:
1. The person filed a joint return,
2. The person had gross income of $3,300 or more, or
3. You, or your spouse if filing jointly, could be claimed as a dependent on someone else's 2006 return.

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 HSA.

Special rules for insurance premiums. Generally, you cannot treat insurance premiums as qualified medical expenses for HSAs. 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 HSAs. If you are age 65 or older, you can treat insurance premiums (other than premiums for a Medicare supplemental policy, such as Medigap) as qualified medical expenses for HSAs.

The premiums for long-term care coverage that you can treat as qualified medical expenses are subject to limits based on age and are adjusted annually. See Limit on long-term care premiums you can deduct in the instructions for Schedule A (Form 1040).

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

Deemed distributions from HSAs. The following situations result in deemed taxable distributions from your HSA.

You engaged in any transaction prohibited by section 4975 with respect to any of your HSAs, at any time in 2006. Your account ceases to be an HSA as of January 1, 2006, and you must include the fair market value of all assets in the account as of January 1, 2006, on Form 8889, line 12a.
You used any portion of any of your HSAs as security for a loan at any time in 2006. 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 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.

Reporting Distributions on Your Return

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

If you use a distribution from your HSA for qualified medical expenses, you do not pay tax on the distribution but you have to report the distribution on Form 8889. However, the distribution of an excess contribution taken out after the due date, including extensions, of your return is subject to tax even if used for qualified medical expenses. Follow the instructions for the form and file it with your Form 1040.
If you do not use a distribution from your HSA for qualified medical expenses, you must pay tax on the distribution. Report the amount on Form 8889 and file it with your Form 1040. If you have a taxable HSA distribution, include it in the total on Form 1040, line 21, and enter “HSA” and the amount on the dotted line next to line 21. You may have to pay an additional 10% tax on your taxable distribution.

Additional tax. There is an additional 10% tax on the part of your distributions not used for qualified medical expenses. Figure the tax on Form 8889 and file it with your Form 1040. Report the additional tax on Form 1040, line 63, and enter “HSA” and the amount on the dotted line next to line 63.

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

Balance in an HSA

An HSA is generally exempt from tax. You are permitted to take a distribution from your HSA 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 HSA are not included in your income while held in the HSA.

Death of HSA Holder

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

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

Spouse is not the designated beneficiary. If your spouse is not the designated beneficiary of your HSA:

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

If your estate is the beneficiary, the value is 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.

Filing Form 8889

You must file Form 8889 with your Form 1040 if you (or your spouse, if married filing a joint return) had any activity in your HSA during the year. You must file the form even if only your employer or your spouse's employer made contributions to the HSA.

Employer Participation

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

Health plan. If you want your employees to be able to have an HSA, they must have an HDHP. You can provide no additional coverage other than those exceptions listed previously under Other health coverage.

Contributions. You can make contributions to your employees' HSAs. 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.

Comparable contributions. If you decide to make contributions, you must make comparable contributions to all comparable participating employees' HSAs. 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.

Comparable participating employees. Comparable participating employees:

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

The comparability rules do not apply to contributions made through a cafeteria plan.

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

Employment taxes. Amounts you contribute to your employees' HSAs 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. This includes the amounts the employee elected to contribute through a cafeteria plan. Enter code “W” in box 12.

Medical Savings Accounts (MSAs)

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.

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.

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.

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 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.

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.

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, your Archer MSA moves with you. 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 2006.

Type of Coverage	Minimum Annual Deductible	Maximum Annual Deductible	Maximum Annual Out-of-Pocket Expenses
Self-only	$1,800	$2,700	$3,650
Family	$3,650	$5,450	$6,650

Example.

You have family health insurance coverage in 2006. 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 ($3,650) for family coverage.

Other health coverage. You (and your spouse, if you have family coverage) generally cannot have any other health coverage that is not an HDHP. However, you can still be an eligible individual even if your spouse has non-HDHP coverage provided you are not covered by that plan. However, you can have additional insurance that provides benefits only for the following items.

Liabilities incurred under 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.

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.

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.

Limits

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

The annual deductible limit.
An income limit.

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.

Example 1.

You have an HDHP for your family all year in 2006. 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, 2006 (6 months). The annual deductible is $4,000. You can contribute up to $1,500 ($4,000 × 75% ÷ 12 × 6) 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 2006. 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.

Example 2.

Joe Craft is self-employed. He had an HDHP for his family for the entire year in 2006. The annual deductible was $4,000. Based on the annual deductible, the maximum contribution to his Archer MSA would have been $3,000 (75% × $4,000). 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.

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.