An Archer MSA is an account into which the accountholder can deposit money that will be used to pay future medical expenses. Archer MSAs were created to help the self-employed and employees of small businesses reduce the high costs of health care. The Archer MSA program started in 1997 under the Health Insurance Portability and Accountability Act (HIPAA) of 1996 and expired on December 31, 2007. After this date, no new Archer MSAs can be established, but Archer MSAs established before this date can continue to be used and receive contributions.
Accountholders save money on health care because, if used properly, Archer MSAs provide the following tax breaks:
- Money that is contributed to the account by the accountholder can be deducted on his or her federal income tax return, even if the accountholder does not itemize
- Money that is contributed to an account by an accountholder’s employer is not taxable income to the accountholder
- Interest that accrues on the account is not taxable income to the accountholder
To obtain these tax breaks, Archer MSAs must be paired with a high-deductible health plan (HDHP). HDHPs generally have lower premiums, saving accountholders even more money, which can be used to fund the account. Because the premiums are lower, Archer MSAs make health insurance coverage more affordable and, therefore, available to eligible individuals who might otherwise go uninsured.
Accountholders also benefit from Archer MSAs because, unlike flexible spending accounts (FSA), (1) funds in an Archer MSA roll over from year to year until they are used, and (2) Archer MSAs are portable (i.e., the account goes with the holder if he or she changes jobs or leaves the workforce).
Tip: You may be able to establish a similar type of savings vehicle, called a health savings account (HSA). HSAs, created as part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, expand upon the benefits offered by Archer MSAs. Accountholders can roll over funds from an Archer MSA to an HSA.
Who Can Participate in an Archer MSA?
Under the current Archer MSA trial program, there are very specific guidelines regarding who can open an Archer MSA. Among the limitations are the following:
Available Only to Employees of Small Employers and Self-Employed Individuals
Currently, only two categories of individuals are eligible to open Archer MSAs. If you are an employee (or the spouse of an employee) of a company that employs 50 or fewer employees and maintains a high-deductible health plan, you are eligible to open an Archer MSA. Also, if you are self-employed or married to a self-employed individual, you are eligible to open an Archer MSA if you also have a high-deductible health insurance plan.
Participate in High-Deductible Health Insurance Plan
To qualify for an Archer MSA, you must be covered by a high-deductible health plan (HDHP). See below for more information.
Not Covered by Other Medical Insurance
In most cases, you are not eligible to open an Archer MSA if you are also covered by an additional health plan that is not a high-deductible plan. This includes Medicare coverage. However, there are some exceptions to this rule. You are still eligible for an Archer MSA if your additional coverage is for accidents, disability, dental, vision, or long-term care, a specific disease or illness, or a fixed amount per day of hospitalization.
Only You or Your Employer Can Contribute to Your Archer MSA
If you are eligible to open an Archer MSA because you work for a small employer, you may make contributions to an Archer MSA or your employer may contribute to an Archer MSA on your behalf–but not both. If you are self-employed, no one can contribute to your Archer MSA except you.
What is a High-Deductible Health Plan (HDHP)?
An HDHP is a plan with an annual deductible in 2012 of at least $2,100 for single (self-only) coverage ($4,200 for family coverage) and maximum annual out-of-pocket expenses required to be paid not exceeding $4,200 for individual (self-only) coverage and $7,650 for families.
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
How Much Can You Contribute to an Archer MSA?
The maximum amount that can be contributed to an Archer MSA in any given year is 65 percent of the deductible on an individual (self only) HDHP. This maximum is increased to 75 percent of the deductible on a family HDHP.
Income limits also apply. If your HDHP is provided through your employer, you cannot contribute more than you have earned for the year from that employer. If you are self-employed, you cannot contribute more than your net self-employment income (i.e., your income from self-employment minus expenses).
If your spouse is covered by your HDHP and excludable contributions are made by your spouse (or your spouse’s employer) to an Archer MSA belonging to your spouse, you cannot make contributions to your own Archer MSA that year.
Caution: You must pay a 6 percent excise tax on contributions that are in excess of the limits discussed above. This tax will not apply, however, if you withdraw the excess funds (and any income earned on the excess funds) from your account before the date your Form 1040 is due.
Only you or your employer can contribute to your Archer MSA. You can make contributions to your Archer MSA or your employer can contribute to your Archer MSA on your behalf—but you and your employer can’t both make contributions in the same year. If you are self-employed, no one can contribute to your Archer MSA except you.
How Do You Set Up an Archer MSA?
Under the HIPAA, Archer MSAs may be established with a financial institution, trustee, or insurance company. When you shop for a high-deductible insurance plan, look for an insurance company that is highly rated by an independent rating firm. If you choose a financial institution to hold your Archer MSA funds, make sure the institution is financially sound. Your insurance agent or financial professional can give you more information.
How Much Does It Cost to Set Up an Archer MSA?
The cost of setting up an Archer MSA will vary depending on the company you go through. Companies with an Archer MSA program may charge a minimal one-time fee for setting up the account. Some also charge a maintenance fee, which should be no more than a few dollars per month. Avoid programs with high administrative costs and those that charge a fee each time you access your account.
What Aare the Tax Consequences of Archer MSAs?
Contributions
Contributions to an Archer MSA must be made in cash; you cannot use stock or other property to fund your Archer MSA. Amounts you contribute to your Archer MSA are deductible “above-the-line” (i.e., you need not itemize to take the deduction). You generally have until April 15 of the following year to make contributions for any given year (e.g., until April 15, 2012 to make contributions for 2011).
If your employer makes contributions to your Archer MSA, this money is not considered taxable income to you. However, employers must report such contributions on the employee’s W-2.
Caution: If another taxpayer can claim you as an exemption, you cannot deduct your Archer MSA contributions. This is true even if the taxpayer does not actually claim the exemption.
Tip: Report all contributions to your Archer MSA on Form 8853 and attach it to your Form 1040.
Earnings
Earnings on Archer MSA funds accumulate on a tax-deferred basis, and will not be taxed when withdrawn as long as they are used to pay qualified medical expenses.
Distributions
As long as distributions (contributions and earnings) from your Archer MSA are used to pay qualified medical expenses, they are tax free. However, if you use the money from your Archer MSA for any other purpose, you must pay ordinary income tax on the amount of the distribution. In addition, a 20 percent penalty will be imposed, unless the distribution is made because of death or disability, or you are at least 65 years old.
How Do You Access the Money in Your Archer MSA?
Many institutions issue debit cards or checks allowing you to withdraw Archer MSA funds quickly and easily. Others require that you submit claims for reimbursement.
How Are You Allowed to Use Your Archer MSA funds?
You can use the money in your Archer MSA to cover medical expenses incurred before your high-deductible insurance kicks in. Once your insurance begins to pay, Archer MSA funds can be used to pay medical expenses that are not covered by your insurance.
To qualify for tax benefits, funds withdrawn from your Archer MSA must be used to pay for “qualified medical expenses.” The following is a partial list of qualified medical expenses:
- Acupuncture
- Alcohol or drug addiction treatment
- Ambulance service
- Artificial limbs and teeth
- Birth control pills
- Braille books
- Car equipment for the disabled
- Chiropractic care
- Contact lenses and eyeglasses
- Cosmetic surgery, if performed to correct damage caused by a genetic defect, accident, trauma, or disfiguring disease
- Crutches
- Dental treatment
- Guide dog for the blind
- Health insurance premiums (only if unemployed)
- Hearing aids
- Hospital services, room, and board
- Laboratory fees
- Legal fees incurred to authorize treatment for mental illness
- Long-term care insurance premiums
- Nursing home care
- Nursing services
- Orthodontia
- Physical therapy
- Prescription medicine
- Psychiatric or psychological care
- Psychoanalysis
- Transplants
- Transportation essential to medical care
- Tuition paid to a special school for child with severe learning disability caused by mental or physical impairments
- Wheelchair
- X rays
Caution: Insurance premiums are generally not included in the list of qualified medical expenses.
Caution: Beginning in 2011, expenses incurred for over-the-counter (OTC) medications are no longer be eligible for payment or reimbursement from any of the health-care accounts (Archer MSAs, FSAs, HRAs, and HSAs). However, the law would still allow OTC medicines obtained with a prescription and insulin to be reimbursed or paid tax-free from these accounts.
What Happens to Archer MSA Money if You Don’t Spend it by the End of the Year?
Unlike a flexible spending account (FSA), where accountholders lose any funds remaining in the account at the plan’s deadline (either the end of the plan year or up to 2½ months after the end of the plan year), Archer MSA funds roll over from year to year until they are spent.
What Happens to Archer MSA Money if You Retire?
Although you can’t continue to contribute to your Archer MSA once you retire, you can keep the funds that remain in your account at retirement and withdraw them when necessary. Once you reach age 65, no penalty will be assessed on withdrawals, regardless of how you use the money, but withdrawals that are not used for qualified medical expenses are considered taxable income.
What Happens to Your Archer MSA if You Leave Your Current Employer?
If you leave your employer, you can keep and contribute to your Archer MSA as long as you continue to participate in an HDHP. If your new employer doesn’t offer an insurance plan that meets Archer MSA guidelines, you can keep your Archer MSA and use the funds in the account for qualified expenses, as you did previously. However, you can no longer make contributions to this account.
What Happens to Your Archer MSA if You Die?
- If your spouse is the beneficiary of your Archer MSA, it will be treated as your spouse’s Archer MSA after your death
- If someone other than your spouse is named, the account will be closed, and the fair market value (FMV) of the Archer MSA becomes taxable to the beneficiary
- If you have no beneficiary, the FMV of the Archer MSA will be included on your final income tax return after your death
If you have insurance questions or need assistance, contact the experts at Henssler Financial: 770-429-9166 or experts@henssler.com.
Disclosures:
The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing.
