26 USC 220 - Archer MSAs

U.S Code last checked for updates: Nov 22, 2024

§ 220.

Archer MSAs

(a)

Deduction allowed

(b)

Limitations

(1)

In general

(2)

Monthly limitation

The monthly limitation for any month is the amount equal to ¹⁄₁₂ of—

(A)

in the case of an individual who has self-only coverage under the high deductible health plan as of the first day of such month, 65 percent of the annual deductible under such coverage, and

(B)

in the case of an individual who has family coverage under the high deductible health plan as of the first day of such month, 75 percent of the annual deductible under such coverage.

(3)

Special rule for married individuals

In the case of individuals who are married to each other, if either spouse has family coverage—

(A)

both spouses shall be treated as having only such family coverage (and if such spouses each have family coverage under different plans, as having the family coverage with the lowest annual deductible), and

(B)

the limitation under paragraph (1) (after the application of subparagraph (A) of this paragraph) shall be divided equally between them unless they agree on a different division.

(4)

Deduction not to exceed compensation

(A)

Employees

(B)

Self-employed individuals

(C)

Community property laws not to apply

(5)

Coordination with exclusion for employer contributions

No deduction shall be allowed under this section for any amount paid for any taxable year to an Archer MSA of an individual if—

(A)

any amount is contributed to any Archer MSA of such individual for such year which is excludable from gross income under section 106(b), or

(B)

if such individual’s spouse is covered under the high deductible health plan covering such individual, any amount is contributed for such year to any Archer MSA of such spouse which is so excludable.

(6)

Denial of deduction to dependents

(7)

Medicare eligible individuals

(c)

Definitions

For purposes of this section—

(1)

Eligible individual

(A)

In general

The term “eligible individual” means, with respect to any month, any individual if—

(i)

such individual is covered under a high deductible health plan as of the 1st day of such month,

(ii)

such individual is not, while covered under a high deductible health plan, covered under any health plan—

(I)

which is not a high deductible health plan, and

(II)

which provides coverage for any benefit which is covered under the high deductible health plan, and

(iii)

(I)

the high deductible health plan covering such individual is established and maintained by the employer of such individual or of the spouse of such individual and such employer is a small employer, or

(II)

such individual is an employee (within the meaning of section 401(c)(1)) or the spouse of such an employee and the high deductible health plan covering such individual is not established or maintained by any employer of such individual or spouse.

(B)

Certain coverage disregarded

Subparagraph (A)(ii) shall be applied without regard to—

(i)

coverage for any benefit provided by permitted insurance, and

(ii)

coverage (whether through insurance or otherwise) for accidents, disability, dental care, vision care, or long-term care.

(C)

Continued eligibility of employee and spouse establishing Archer MSAs

If, while an employer is a small employer—

(i)

any amount is contributed to an Archer MSA of an individual who is an employee of such employer or the spouse of such an employee, and

(ii)

such amount is excludable from gross income under section 106(b) or allowable as a deduction under this section,

such individual shall not cease to meet the requirement of subparagraph (A)(iii)(I) by reason of such employer ceasing to be a small employer so long as such employee continues to be an employee of such employer.

(D)

Limitations on eligibility

(2)

High deductible health plan

(A)

In general

The term “high deductible health plan” means a health plan—

(i)

in the case of self-only coverage, which has an annual deductible which is not less than $1,500 and not more than $2,250,

(ii)

in the case of family coverage, which has an annual deductible which is not less than $3,000 and not more than $4,500, and

(iii)

the annual out-of-pocket expenses required to be paid under the plan (other than for premiums) for covered benefits does not exceed—

(I)

$3,000 for self-only coverage, and

(II)

$5,500 for family coverage.

(B)

Special rules

(i)

Exclusion of certain plans

(ii)

Safe harbor for absence of preventive care deductible

(3)

Permitted insurance

The term “permitted insurance” means—

(A)

insurance if substantially all of the coverage provided under such insurance relates to—

(i)

liabilities incurred under workers’ compensation laws,

(ii)

tort liabilities,

(iii)

liabilities relating to ownership or use of property, or

(iv)

such other similar liabilities as the Secretary may specify by regulations,

(B)

insurance for a specified disease or illness, and

(C)

insurance paying a fixed amount per day (or other period) of hospitalization.

(4)

Small employer

(A)

In general

(B)

Employers not in existence in preceding year

(C)

Certain growing employers retain treatment as small employer

The term “small employer” includes, with respect to any calendar year, any employer if—

(i)

such employer met the requirement of subparagraph (A) (determined without regard to subparagraph (B)) for any preceding calendar year after 1996,

(ii)

any amount was contributed to the Archer MSA of any employee of such employer with respect to coverage of such employee under a high deductible health plan of such employer during such preceding calendar year and such amount was excludable from gross income under section 106(b) or allowable as a deduction under this section, and

(iii)

such employer employed an average of 200 or fewer employees on business days during each preceding calendar year after 1996.

(D)

Special rules

(i)

Controlled groups

(ii)

Predecessors

(5)

(d)

Archer MSA

For purposes of this section—

(1)

Archer MSA

The term “Archer MSA” means a trust created or organized in the United States as a medical savings account exclusively for the purpose of paying the qualified medical expenses of the account holder, but only if the written governing instrument creating the trust meets the following requirements:

(A)

Except in the case of a rollover contribution described in subsection (f)(5), no contribution will be accepted—

(i)

unless it is in cash, or

(ii)

to the extent such contribution, when added to previous contributions to the trust for the calendar year, exceeds 75 percent of the highest annual limit deductible permitted under subsection (c)(2)(A)(ii) for such calendar year.

(B)

The trustee is a bank (as defined in section 408(n)), an insurance company (as defined in section 816), or another person who demonstrates to the satisfaction of the Secretary that the manner in which such person will administer the trust will be consistent with the requirements of this section.

(C)

No part of the trust assets will be invested in life insurance contracts.

(D)

The assets of the trust will not be commingled with other property except in a common trust fund or common investment fund.

(E)

The interest of an individual in the balance in his account is nonforfeitable.

(2)

Qualified medical expenses

(A)

In general

(B)

Health insurance may not be purchased from account

(i)

In general

(ii)

Exceptions

Clause (i) shall not apply to any expense for coverage under—

(I)

a health plan during any period of continuation coverage required under any Federal law,

(II)

a qualified long-term care insurance contract (as defined in section 7702B(b)), or

(III)

a health plan during a period in which the individual is receiving unemployment compensation under any Federal or State law.

(C)

Medical expenses of individuals who are not eligible individuals

(3)

Account holder

(4)

Certain rules to apply

Rules similar to the following rules shall apply for purposes of this section:

(A)

Section 219(d)(2) (relating to no deduction for rollovers).

(B)

Section 219(f)(3) (relating to time when contributions deemed made).

(C)

Except as provided in section 106(b), section 219(f)(5) (relating to employer payments).

(D)

Section 408(g) (relating to community property laws).

(E)

Section 408(h) (relating to custodial accounts).

(e)

Tax treatment of accounts

(1)

In general

(2)

Account terminations

(f)

Tax treatment of distributions

(1)

Amounts used for qualified medical expenses

(2)

Inclusion of amounts not used for qualified medical expenses

(3)

Excess contributions returned before due date of return

(A)

In general

If any excess contribution is contributed for a taxable year to any Archer MSA of an individual, paragraph (2) shall not apply to distributions from the Archer MSAs of such individual (to the extent such distributions do not exceed the aggregate excess contributions to all such accounts of such individual for such year) if—

(i)

such distribution is received by the individual on or before the last day prescribed by law (including extensions of time) for filing such individual’s return for such taxable year, and

(ii)

such distribution is accompanied by the amount of net income attributable to such excess contribution.

Any net income described in clause (ii) shall be included in the gross income of the individual for the taxable year in which it is received.

(B)

Excess contribution

(4)

Additional tax on distributions not used for qualified medical expenses

(A)

In general

(B)

Exception for disability or death

(C)

Exception for distributions after medicare eligibility

(5)

Rollover contribution

An amount is described in this paragraph as a rollover contribution if it meets the requirements of subparagraphs (A) and (B).

(A)

In general

(B)

Limitation

(6)

Coordination with medical expense deduction

(7)

Transfer of account incident to divorce

(8)

Treatment after death of account holder

(A)

Treatment if designated beneficiary is spouse

(B)

Other cases

(i)

In general

If, by reason of the death of the account holder, any person acquires the account holder’s interest in an Archer MSA in a case to which subparagraph (A) does not apply—

(I)

such account shall cease to be an Archer MSA as of the date of death, and

(II)

an amount equal to the fair market value of the assets in such account on such date shall be includible if such person is not the estate of such holder, in such person’s gross income for the taxable year which includes such date, or if such person is the estate of such holder, in such holder’s gross income for the last taxable year of such holder.

(ii)

Special rules

(I)

Reduction of inclusion for pre-death expenses

(II)

Deduction for estate taxes

(g)

Cost-of-living adjustment

In the case of any taxable year beginning in a calendar year after 1998, each dollar amount in subsection (c)(2) shall be increased by an amount equal to—

(1)

such dollar amount, multiplied by

(2)

the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which such taxable year begins by substituting “calendar year 1997” for “calendar year 2016” in subparagraph (A)(ii) thereof.

If any increase under the preceding sentence is not a multiple of $50, such increase shall be rounded to the nearest multiple of $50.

(h)

Reports

(i)

Limitation on number of taxpayers having Archer MSAs

(1)

In general

Except as provided in paragraph (5), no individual shall be treated as an eligible individual for any taxable year beginning after the cut-off year unless—

(A)

such individual was an active MSA participant for any taxable year ending on or before the close of the cut-off year, or

(B)

such individual first became an active MSA participant for a taxable year ending after the cut-off year by reason of coverage under a high deductible health plan of an MSA-participating employer.

(2)

Cut-off year

For purposes of paragraph (1), the term “cut-off year” means the earlier of—

(A)

calendar year 2007, or

(B)

the first calendar year before 2007 for which the Secretary determines under subsection (j) that the numerical limitation for such year has been exceeded.

(3)

Active MSA participant

For purposes of this subsection—

(A)

In general

(B)

Special rule for cut-off years before 2007

In the case of a cut-off year before 2007—

(i)

an individual shall not be treated as an eligible individual for any month of such year or an active MSA participant under paragraph (1)(A) unless such individual is, on or before the cut-off date, covered under a high deductible health plan, and

(ii)

an employer shall not be treated as an MSA-participating employer unless the employer, on or before the cut-off date, offered coverage under a high deductible health plan to any employee.

(C)

Cut-off date

For purposes of subparagraph (B)—

(i)

In general

(ii)

Employees with enrollment periods after October 1

(iii)

Self-employed individuals

(iv)

Special rules for 1997

If 1997 is a cut-off year by reason of subsection (j)(1)(A)—

(I)

each of the cut-off dates under clauses (i) and (iii) shall be 1 month earlier than the date determined without regard to this clause, and

(II)

clause (ii) shall be applied by substituting “4 months” for “3 months”.

(4)

MSA-participating employer

For purposes of this subsection, the term “MSA-participating employer” means any small employer if—

(A)

such employer made any contribution to the Archer MSA of any employee during the cut-off year or any preceding calendar year which was excludable from gross income under section 106(b), or

(B)

at least 20 percent of the employees of such employer who are eligible individuals for any month of the cut-off year by reason of coverage under a high deductible health plan of such employer each made a contribution of at least $100 to their Archer MSAs for any taxable year ending with or within the cut-off year which was allowable as a deduction under this section.

(5)

Additional eligibility after cut-off year

If the Secretary determines under subsection (j)(2)(A) that the numerical limit for the calendar year following a cut-off year described in paragraph (2)(B) has not been exceeded—

(A)

this subsection shall not apply to any otherwise eligible individual who is covered under a high deductible health plan during the first 6 months of the second calendar year following the cut-off year (and such individual shall be treated as an active MSA participant for purposes of this subsection if a contribution is made to any Archer MSA with respect to such coverage), and

(B)

any employer who offers coverage under a high deductible health plan to any employee during such 6-month period shall be treated as an MSA-participating employer for purposes of this subsection if the requirements of paragraph (4) are met with respect to such coverage.

For purposes of this paragraph, subsection (j)(2)(A) shall be applied for 1998 by substituting “750,000” for “600,000”.

(j)

Determination of whether numerical limits are exceeded

(1)

Determination of whether limit exceeded for 1997

The numerical limitation for 1997 is exceeded if, based on the reports required under paragraph (4), the number of Archer MSAs established as of—

(A)

April 30, 1997, exceeds 375,000, or

(B)

June 30, 1997, exceeds 525,000.

(2)

Determination of whether limit exceeded for 1998, 1999, 2001, 2002, 2004, 2005, or 2006

(A)

In general

The numerical limitation for 1998, 1999, 2001, 2002, 2004, 2005, or 2006 is exceeded if the sum of—

(i)

the number of MSA returns filed on or before April 15 of such calendar year for taxable years ending with or within the preceding calendar year, plus

(ii)

the Secretary’s estimate (determined on the basis of the returns described in clause (i)) of the number of MSA returns for such taxable years which will be filed after such date,

exceeds 750,000 (600,000 in the case of 1998). For purposes of the preceding sentence, the term “MSA return” means any return on which any exclusion is claimed under section 106(b) or any deduction is claimed under this section.

(B)

Alternative computation of limitation

The numerical limitation for 1998, 1999, 2001, 2002, 2004, 2005, or 2006 is also exceeded if the sum of—

(i)

90 percent of the sum determined under subparagraph (A) for such calendar year, plus

(ii)

the product of 2.5 and the number of Archer MSAs established during the portion of such year preceding July 1 (based on the reports required under paragraph (4)) for taxable years beginning in such year,

exceeds 750,000.

(C)

No limitation for 2000 or 2003

(3)

Previously uninsured individuals not included in determination

(A)

In general

(B)

Previously uninsured individual

(4)

Reporting by MSA trustees

(A)

In general

Not later than August 1 of 1997, 1998, 1999, 2001, 2002, 2004, 2005, and 2006, each person who is the trustee of an Archer MSA established before July 1 of such calendar year shall make a report to the Secretary (in such form and manner as the Secretary shall specify) which specifies—

(i)

the number of Archer MSAs established before such July 1 (for taxable years beginning in such calendar year) of which such person is the trustee,

(ii)

the name and TIN of the account holder of each such account, and

(iii)

the number of such accounts which are accounts of previously uninsured individuals.

(B)

Additional report for 1997

(C)

Penalty for failure to file report

The penalty provided in section 6693(a) shall apply to any report required by this paragraph, except that—

(i)

such section shall be applied by substituting “$25” for “$50”, and

(ii)

the maximum penalty imposed on any trustee shall not exceed $5,000.

(D)

Aggregation of accounts

(5)

Date of making determinations

(Added Pub. L. 104–191, title III, § 301(a), Aug. 21, 1996, 110 Stat. 2037; amended Pub. L. 105–33, title IV, § 4006(b)(2), Aug. 5, 1997, 111 Stat. 333; Pub. L. 105–34, title XVI, § 1602(a)(2), (3), Aug. 5, 1997, 111 Stat. 1093, 1094; Pub. L. 106–554, § 1(a)(7) [title II, §§ 201(a), (b), 202(a)(4), (b)(2)(B), (3)–(8), (10), (11)], Dec. 21, 2000, 114 Stat. 2763, 2763A–628, 2763A–629; Pub. L. 107–147, title VI, § 612(a), (b), Mar. 9, 2002, 116 Stat. 61; Pub. L. 108–173, title XII, § 1201(c), Dec. 8, 2003, 117 Stat. 2476; Pub. L. 108–311, title II, § 207(19), title III, § 322(a), (b), Oct. 4, 2004, 118 Stat. 1178, 1183; Pub. L. 109–432, div. A, title I, § 117(a), (b), Dec. 20, 2006, 120 Stat. 2941; Pub. L. 111–148, title IX, §§ 9003(b), 9004(b), Mar. 23, 2010, 124 Stat. 854; Pub. L. 115–97, title I, §§ 11002(d)(1)(T), 11051(b)(3)(D), Dec. 22, 2017, 131 Stat. 2060, 2090; Pub. L. 116–136, div. A, title III, § 3702(b), Mar. 27, 2020, 134 Stat. 416.)

cite as: 26 USC 220