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Today’s topic is, in many ways, similar to the previous one, the Health Savings Account (HSA), but its history is a little different.
The Medical Savings Account (MSA) program was created in 1996 and was sponsored by Congressman Bill Archer of Texas, hence its name. In 2003, when the the health savings account was created, the Archer MSA program expired. After December 31, 2007, no new Archer MSAs can be established, but Archer MSAs established before this date can continue to be used and receive contributions.
An Archer MSA is a tax-exempt trust or custodial account 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.
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After 2007, you can be treated as an eligible individual for Archer MSA purposes only if:
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- You were an active participant for any tax year ending before 2008, or
- You became an active participant for a tax year ending after 2007, by reason of coverage under a high deductible health plan (HDHP) of an Archer MSA participating employer.
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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). To qualify for an Archer MSA, you must be either of the following.
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- An employee (or the spouse of an employee) of a small employer 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.
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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.
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.
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For taxable years beginning in 2019, high deductible health plans in the MSA context will be defined as follows.
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- A health plan that has an annual deductible that is not less than $2,350 and not more than $3,500 for self-only coverage, with annual out-of-pocket expenses not to exceed $4,650.
- A health plan that has an annual deductible that is not less than $4,650 and not more than $7,000 for family coverage, with annual out-of-pocket expenses not to exceed $8,550.
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You may enjoy several benefits from having an Archer MSA:
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- You can claim a tax deduction for contributions you make even if you don’t itemize your deductions on Schedule A (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.
- 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.
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You can have no other health or Medicare coverage except what is permitted as other health coverage. You must be an eligible individual on the first day of a given month to get an Archer MSA deduction for that month.
You can have additional insurance that provides benefits only for the following items:
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You also can have coverage (whether provided through insurance or otherwise) for: accidents, disability, dental care, vision care, and long-term care.
Contributions to an Archer MSA must be made in cash. You can’t contribute stock or other property to an Archer MSA.
If you are an employee, your employer may make contributions to your Archer MSA. (You don’t pay tax on these contributions.)
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If your employer doesn’t make contributions to your Archer MSA, or you are self- employed, you can make your own contributions to your Archer MSA. You and your employer can’t make contributions to your Archer MSA in the same year. You don’t have to make contributions to your Archer MSA every year.
There are two limits on the amount you or your employer can contribute to your Archer MSA:
- The 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.
- The income limit. You can’t contribute more than you earned for the year from the employer through whom you have your HDHP. If you are self-employed, you can’t contribute more than your net self-employment income. This is your income from self-employment minus expenses (including the deductible part of self-employment tax).
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You can make contributions to your Archer MSA for 2019 until April 15, 2020.
Report all contributions to your Archer MSA on Form 8853, Archer MSAs and Long- Term Care Insurance Contracts, and file it with your Form 1040 or Form 1040NR. You should include all contributions you or your employer made for the year.
You generally will 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 aren’t 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. If you receive distributions for other reasons, the amount will be subject to income tax and may be subject to an additional 20% tax as well. You don’t 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.
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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.
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.
You must keep records sufficient to show that:
- The distributions were exclusively to pay or reimburse qualified medical expenses,
- The qualified medical expenses hadn’t been previously paid or reimbursed from another source, and
- The medical expenses hadn’t been taken as an itemized deduction in any year.
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Don’t send these records with your tax return, keep them with your tax records.
If you use a distribution from your Archer MSA for qualified medical expenses, you don’t pay tax on the distribution but you have to report the distribution on Form 8853.
If you don’t use a distribution from your Archer MSA for qualified medical expenses, you must pay tax on the distribution.
It is advisable that you 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. More information on the MSAs can be found in Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.
We should also mention the Medicare Advantage MSA, which 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 an HDHP that meets the Medicare guidelines.
Like the Archer MSA, the 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 isn’t taxed if it is used for qualified medical expenses, and it may earn interest or dividends.
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Medicare Advantage MSAs are administered through the federal Medicare program and you can get more information on this program at Medicare.gov.
This mini-series is almost over and we hope it will help you decide what kind of savings account for medical purposes that you qualify for is more attractive and appropriate for your needs. In any case, do not forger, professional expert advice is always your best option.
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