After December 31, 2007, you cannot be treated as an eligible individual for Archer MSA purposes unless:
- You were an active participant for any tax year ending before January 1, 2008, or
- You became an active participant for a tax year ending after December 31, 2007, by reason of coverage under a high deductible health plan of an Archer MSA participating employer.
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.taxmap/pubs/p969-001.htm#en_us_publink100038809
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#en_us_publink100038810
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 or Form 1040NR.
- 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.
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 a self-only or family HDHP for you (or your spouse).
- A self-employed person (or the spouse of a self-employed person) who maintains a self-only 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.
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#en_us_publink100038814
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.
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#en_us_publink100038816
To be eligible for an Archer MSA, you must be covered under 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.
The following table shows the limits for annual deductibles and the maximum out-of-pocket expenses for high deductible health plans for 2008.
|Type of Coverage||Minimum|
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#en_us_publink100038819
You have family health insurance coverage in 2008. 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 ($3,850) for family coverage.taxmap/pubs/p969-001.htm#en_us_publink100038820
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.
- Dental care.
- Vision care.
- Long-term care.
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#en_us_publink100038822
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.
There are two limits on the amount you or your employer can contribute to your Archer MSA:
- The annual deductible limit.
- An income 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 Instructions for Form 8853, Archer MSAs and Long-Term Care Insurance Contracts.taxmap/pubs/p969-001.htm#en_us_publink100038826
You have an HDHP for your family all year in 2008. 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#en_us_publink100038827
You have an HDHP for your family for the entire months of July through December, 2008 (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.
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#en_us_publink100038830
Bob Smith earned $25,000 from ABC Company in 2008. 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#en_us_publink100038831
Joe Craft is self-employed. He had an HDHP for his family for the entire year in 2008. 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.taxmap/pubs/p969-001.htm#en_us_publink100038832
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#en_us_publink100038833
You can make contributions to your Archer MSA for 2008 until April 15, 2009.taxmap/pubs/p969-001.htm#en_us_publink100038834
Report all contributions to your Archer MSA on Form 8853 and file it with your Form 1040 or Form 1040NR. You should include all contributions you, or your employer, made for 2008, including those made by April 15, 2009, that are designated for 2008.
You should receive Form 5498-SA, HSA, Archer MSA, or Medicare Advantage 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 36, or Form 1040NR, line 34. taxmap/pubs/p969-001.htm#en_us_publink100038835
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. 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.
- 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.
You may be able to deduct excess contributions for previous years that are still in your Archer MSA. The excess contribution you can deduct in the current year is the lesser of the following two amounts.
- Your maximum Archer MSA contribution limit for the year minus any amounts contributed to your Archer MSA for the year.
- The total excess contributions in your Archer MSA at the beginning of the year.
Any excess contributions remaining at the end of a tax year is subject to the additional tax. See Form 5329.taxmap/pubs/p969-001.htm#en_us_publink100038836
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 Advantage MSA. taxmap/pubs/p969-001.htm#en_us_publink100038838
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. However, even though non-prescription medicines (other than insulin) do not qualify for the medical and dental expenses deduction, they do qualify as expenses for MSA purposes. Qualified medical expenses are those incurred by the following persons.
- You 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:
- The person filed a joint return,
- The person had gross income of $3,500 or more, or
- You, or your spouse if filing jointly, could be claimed as a dependent on someone else's 2008 return.
For this purpose, a child of parents that are divorced, separated, or living apart for the last 6 months of the calendar year is treated as the dependent of both parents whether or not the custodial parent releases the claim to the child's exemption.
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.
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#en_us_publink100038841
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#en_us_publink100038842
The following situations result in deemed taxable distributions from your Archer MSA.
- You engaged in any transaction prohibited by section 4975 with respect to any of your Archer MSAs at any time in 2008. Your account ceases to be an Archer MSA as of January 1, 2008, and you must include the fair market value of all assets in the account as of January 1, 2008, on line 8a of Form 8853.
- You used any portion of any of your Archer MSAs as security for a loan at any time in 2008. You must include the fair market value of the assets used as security for the loan as income on Form 1040 or Form 1040NR, line 21.
Examples of prohibited transactions include the direct or indirect:
- Sale, exchange, or leasing of property between you and the Archer MSA,
- Lending of money between you and the Archer MSA,
- Furnishing goods, services, or facilities between you and the Archer MSA, and
- Transfer to or use by you, or for your benefit, any assets of the Archer MSA.
Any deemed distribution will not be treated as used to pay qualified medical expenses. These distributions are included in your income and are subject to the additional 15% tax, discussed later.
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.
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 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 or Form 1040NR.
- 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 or Form 1040NR. If you have a taxable Archer MSA distribution, include it in the total on Form 1040 or Form 1040NR, 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.
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 Form 8853 instructions for more information.taxmap/pubs/p969-001.htm#en_us_publink100038847
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 or Form 1040NR. Report the additional tax on Form 1040, line 61, or Form 1040NR, line 57, and enter "MSA" and the amount on the dotted line next to that line. taxmap/pubs/p969-001.htm#en_us_publink100038848
There is no additional tax on distributions made after the date you are disabled, reach age 65, or die.taxmap/pubs/p969-001.htm#en_us_publink100038849
An Archer 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 Archer MSA are not included in your income while held in the Archer MSA.
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#en_us_publink100038851
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#en_us_publink100038852
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.
You must file Form 8853 with your Form 1040 or Form 1040NR 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.
If, during the tax year, you are the beneficiary of 2 or more Archer MSAs or you are a beneficiary of an Archer MSA and you have your own Archer MSA, you must complete a separate Form 8889 for each MSA. Enter "statement" at the top of each Form 8853 and complete the form as instructed. Next, complete a controlling Form 8853 combining the amounts shown on each of the statement Forms 8853. Attach the statements to your tax return after the controlling Form 8853.taxmap/pubs/p969-001.htm#en_us_publink100038855
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#en_us_publink100038856
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.
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#en_us_publink100038858
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.
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).
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#en_us_publink100038861
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. Enter code "R" in box 12. taxmap/pubs/p969-001.htm#en_us_publink100038862
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.
Medicare Advantage 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
You must file Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, with your tax return if you have a Medicare Advantage MSA.