What is an Archer MSA?

An Archer Medical Savings Account (MSA) is a tax-advantaged savings account designed exclusively to pay for qualified medical expenses of the account holder. It is typically established by individuals who are covered under a high-deductible health plan (HDHP) and are employed by a small employer (defined as having an average of 50 or fewer employees during either of the last two calendar years) or are self-employed. To be eligible, the individual (or their spouse) must not be enrolled in Medicare, cannot be another person’s dependent, and must not have any other health coverage except permitted coverage.

Key Features and Rules

• Eligibility: Must be an employee of a small employer or self-employed, covered under an HDHP, and not enrolled in Medicare.
• Contributions: Contributions are tax-deductible, but only up to the applicable portion of the HDHP’s annual deductible and limited by compensation from the employer maintaining the HDHP. Employer contributions to an Archer MSA disallow the individual from making deductible contributions.
• Qualified Medical Expenses: Funds can only be used for qualified medical expenses without penalty. Distributions for non-qualified expenses may be subject to an additional 20% tax.
• Deemed Distributions: Certain actions, such as using account assets as security for a loan or engaging in prohibited transactions under section 4975, result in deemed distributions, which must be reported as income.
• Rollovers: Tax-free rollovers are allowed between Archer MSAs or to a Health Savings Account (HSA), provided completed within 60 days. Direct trustee-to-trustee transfers are not considered rollovers and are unlimited.
• Death of Account Holder: If the surviving spouse is the designated beneficiary, they become the account holder and continue managing the Archer MSA. If not, the account ceases to be an MSA as of the date of death, and the fair market value (FMV) is reported as income. If the estate is the beneficiary, the FMV is included in the decedent’s final income tax return.

Important Limitations

• After December 31, 2007, new contributions to an Archer MSA are generally not allowed unless the individual was an active participant before that date or became one due to HDHP coverage from an Archer MSA participating employer.
• Individuals cannot deduct contributions after enrolling in Medicare or if they are someone else’s dependent.
• Other health coverage (beyond an HDHP) is not permitted for the account holder or spouse (if family coverage is selected).

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Disclaimer: Always verify details with current IRS forms, instructions, and guidance from your state’s Department of Revenue. For complex situations, consult a tax professional or attorney.