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Archer Medical Savings Accounts

Would you like to reduce your health insurance costs, save on taxes, and put away more money for retirement? If you meet certain rules, an Archer medical savings account (Archer MSA) may be just what you're looking for.

What is an Archer MSA?

An Archer MSA is a tax-exempt trust or custodial account set up with a financial institution such as a bank or an insurance company. Contributions you make to the account can be used to pay for health-care expenses not covered by your health insurance plan.

Note: The Archer MSA program 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.

Here are some of the benefits of using an Archer MSA:

  • You can lower your insurance costs
  • Your contributions and any earnings or interest on those contributions grow tax free until withdrawn, and like contributions, will be tax free when withdrawn if used to pay qualified medical expenses
  • You can deduct your contributions on the front of your federal income tax return, even if you don't itemize

Archer MSA must be coupled with a high-deductible health plan

Typically, an Archer MSA works in tandem with a high-deductible health plan (HDHP). An HDHP has a higher deductible than most health plans (e.g., $2,000) and has a maximum limit on the amount you must pay for covered out-of-pocket expenses.

The premiums for an HDHP are generally 20 to 50 percent lower than for a low-deductible health plan. If you are self-employed, they are tax deductible.

An HDHP must meet certain IRS requirements in order to be used in conjunction with an Archer MSA. In 2011, an HDHP must have the following limits to qualify:

Type of coverage Minimum annual deductible Maximum annual deductible Maximum annual out-of-pocket expense
Individual $2,050 $3,050 $4,100
Family $4,100 $6,150 $7,500

Making contributions to your Archer MSA

Tax-deductible contributions to an Archer MSA can be made by you or your employer, but not by both in the same year. You must be covered by an HDHP for the entire year to deduct the full amount. Employer contributions are nontaxable to you.

There are limits to the amount that can be contributed to your Archer MSA. The maximum is 75 percent of your annual health plan deductible if you have a family plan and 65 percent if you have an individual plan. For example, if you have a family plan with a $4,800 deductible, you can contribute up to $3,600 each year. If it is an individual plan with a $2,400 deductible, the most you can contribute is $1,560.

Any contributions over the maximum are not tax deductible, and you will have to pay a 6 percent excise tax on those amounts. The other limitation is that contributions cannot be more than you earned for the year.

Withdrawing money from your Archer MSA

You can withdraw funds from your Archer MSA to pay for unreimbursed medical expenses. Some trustees furnish checks for you to write yourself. Others will give you a debit card that provides instant access to your Archer MSA funds.

You and your trustee are required to report distributions. However, you will not have to pay income tax on this money as long as it was used for qualified medical expenses such as:

  • Ambulance service
  • COBRA continuation coverage
  • Dental expenses
  • Doctor's office visits
  • Emergency treatment
  • Health insurance premiums while unemployed
  • Hospitalization
  • Lab services
  • Prescription drugs
  • Vision care (including eyeglasses)
  • Chiropractic and acupuncture
  • Wellness and preventive programs

If any part of the distribution was used for nonqualified medical expenses, such as premiums for your HDHP or elective cosmetic surgery, you will have to pay income tax plus a 15 percent penalty tax on that amount. There is no penalty tax if you are disabled, are age 65 or older, or die during the year.

Note: Starting in 2011, the tax penalty on Archer MSA withdrawals that are not used for qualified medical expenses will be increased from 15 percent to 20 percent.

Archer MSAs are portable and will remain with you even if you change employers. Any money not used each year for medical expenses will continue to grow tax deferred in the account. The investment option you choose will affect the rate of return you receive. As with any investment, make sure you understand the risks before you sign up.

After age 65, you can withdraw money from your Archer MSA to add to your retirement income. The withdrawals will be taxable, similar to a traditional IRA.

Note: Beginning with 2011, expenses incurred for over-the-counter (OTC) medications are no longer eligible for payment or reimbursement from any of the health-care accounts (Archer MSAs, FSAs, HRAs, and HSAs). However, the law still allows OTC medicines obtained with a prescription and insulin to be reimbursed or paid tax-free from these accounts.

Choosing between an Archer MSA and an HSA

If you currently have an Archer MSA, you may want to look into establishing 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. Funds from an Archer MSA can be rolled over to an HSA, making it simple for you to switch from one type of account to the other. But before you do so, make sure you understand the differences between the two, including the following:

  • Any eligible individual under age 65 who is covered by a qualifying HDHP can establish an HSA; only a self-employed individual or an employee of a small business covered by a qualifying HDHP could establish an Archer MSA.
  • The minimum annual deductible that applies to an HDHP used in conjunction with an HSA is $1,200 for an individual and $2,400 for a family (in 2011, unchanged from 2010), lower than the minimum annual deductible that applies to an HDHP used in conjunction with an Archer MSA.
  • Both you and your employer (if any) can contribute to an HSA during the same year; an Archer MSA does not allow contributions from both individuals and employers during the same year.
  • You can contribute more each year to an HSA than to an Archer MSA. Annual contributions to an HSA are limited to $3,050 for an individual or $6,150 for a family (for tax years 2010 and 2011).
  • If you reach age 55 by the end of the tax year you can make catch-up contributions to your HSA up to $1,000; no catch-up contributions can be made to an Archer MSA.