422 / What is an Archer Medical Savings Account (“MSA”) and how is it taxed?
An Archer Medical Savings Account (“MSA”) is a trust created exclusively for the purpose of paying qualified medical expenses of an account holder,1 who is the individual for whom the Archer MSA was established.2
Archer MSAs were available through the cutoff date discussed below to small business employees and self-employed individuals with high deductible health insurance coverage.
Any insurance company or bank can act as a trustee of an Archer MSA. Additionally, any person already approved by the IRS to act as an individual retirement arrangement (“IRA”) trustee or custodian automatically is approved to act in the same capacity for Archer MSAs.3
Contributions
Contributions to an Archer MSA may be made either by an individual or by his or her small employer, but not by both.4 If made by an individual taxpayer, Archer MSA contributions are deductible from income.5 If made by a small employer, Archer MSA contributions are excluded from employee income.6 An Archer MSA itself is exempt from income tax.7
Distributions
Distributions from Archer MSAs are not includable in gross income if they are used exclusively to pay qualified medical expenses.8 For this purpose, for tax years beginning after December 31, 2010 and before 2020, medications included in qualified medical expenses were limited to doctor-prescribed drugs and insulin. Beginning in 2020, over-the counter medicines are once again counted as qualified expenses regardless of whether they are prescribed by a doctor.9
Distributions used for other purposes are includable in gross income and may be subject to a 15 percent penalty tax, with some exceptions. For distributions made after December 31, 2010, the additional tax on nonqualified distributions from Archer MSAs is increased to 20 percent of any includable amounts.10
High Deductible Health Plan
For Archer MSAs, in the case of self-only coverage, a high deductible health plan is defined as a health plan with an annual deductible of not less than $2,900 in 2026 ($2,850 in 2025, $2,800 in 2024, $2,650 in 2023, $2,450 in 2022, $2,400 in 2021) and not more than $4,400 in 2026 ($4,300 in 2025, $4,150 in 2024, $3,950 in 2023, $3,700 in 2022, $3,600 in 2021 and $3,550 in 2020), and required annual out-of-pocket expenses of not more than $5,850 in 2026 ($5,700 in 2025, $5,550 in 2024, $5,300 in 2023, $4,950 in 2022, and $4,800 in 2021.).11
In the case of family coverage, a high deductible health plan is a health plan with an annual deductible of not less than $5,850 in 2026, $5,700 in 2025, $5,550 in 2024, $5,300 in 2023, $4,950 in 2022, and $4,800 in 2021) and not more than $8,750 in 2026 ($8,550 in 2025, $8,350 in 2024, $7,900 in 2023, $7,400 in 2022, and $7,150 in 2021), and required annual out-of-pocket expenses of not more than $10,700 in 2026 ($10,500 in 2025, $10,200 in 2024, $9,650 in 2023, $9,050 in 2022, and $8,750 in 2021).12 For this purpose, family coverage is defined as any coverage other than self-only coverage.13
Deduction
An eligible individual may deduct the aggregate amount paid in cash into an Archer MSA during a taxable year, subject to a limitation of 65 percent of the annual deductible for individuals with self-only coverage and 75 percent of the annual deductible for individuals with family coverage.14
In addition, IRC Section 220(j)(4)(D) specifies that, to the extent practical, all Archer MSAs established by an individual are aggregated and two married individuals opening separate Archer MSAs are to be treated as having a single Archer MSA for purposes of determining the number of Archer MSAs.15
For married individuals, if either spouse has family coverage, then both spouses are treated as having only family coverage and the deduction limit is divided equally between them, unless they agree on a different division.16 If two spouses both have family coverage under different plans, both spouses are treated as having only the family coverage with the lower deductible.17
An Archer MSA deduction cannot exceed an employee’s compensation attributable to employment with the small employer offering the high deductible health plan. Similarly, an Archer MSA deduction cannot exceed a self-employed individual’s earned income derived from the trade or business with respect to which the high deductible plan is established.18
Excess Contributions
Excess contributions to an HSA or an Archer MSA are subject to a 6 percent tax. The tax may not exceed 6 percent of the value of the account, determined at the close of the taxable year.19
Pilot Cutoff
Archer MSAs were initially available on a pilot basis. The cut-off year for new accounts under the Archer MSA pilot program originally was 2003 but was extended through the end of 2007, which was the last year for creating an Archer MSA.20 No new Archer MSAs may be set up except in some specified circumstances. For instance, eligible individuals still may make contributions to existing accounts. In recent years, very few people have chosen to open Archer MSAs (45 were opened in 2005 and only 11 in 2006).
No individual is treated as an eligible individual for any taxable year beginning after the cut-off year unless (1) the individual was an active Archer MSA participant for any taxable year ending on or before the close of the cut-off year, or (2) the individual first became an active Archer MSA participant for a taxable year ending after the cut-off year by reason of coverage under a high deductible health plan of an Archer MSA-participating employer.21
1. IRC § 220(d)(1).
2. IRC § 220(d)(3).
3. Notice 96-53, 1996-2 CB 219, A-9, A-10.
4. Notice 96-53, 1996-2 CB 219, A-12.
5. IRC § 220(a).
6. IRC § 106(b)(1).
7. IRC § 220(e)(1).
8. IRC § 220(f)(1).
9. IRC § 220(d)(2)(A), as amended by PPACA 2010.
10. IRC §§ 220(f)(2), 220(f)(4), as amended by PPACA 2010.
11. IRC § 220(c)(2)(A); Rev. Proc. 2019-44, Rev. Proc. 2020-45, Rev. Proc. 2021-45, Rev. Proc. 2022-38, Rev. Proc. 2023-34, Rev. Proc. 2024-40.
12. IRC § 220(c)(2)(A); Rev. Proc. 2019-44, Rev. Proc. 2020-45, Rev. Proc. 2021-45, Rev. Proc. 2022-38, Rev. Proc. 2023-34, Rev. Proc. 2024-40.
13. IRC § 220(c)(5).
14. IRC §§ 220(a), 220(b)(2).
15. IRS Announcement 2002-90, 2002-2 CB 684.
16. IRC § 220(b)(3).
17. IRC § 220(b)(3).
18. IRC § 220(b)(4).
19. IRC § 4973(a).
20. IRC § 220(i)(2)(A). See also Ann. 2002-90, 2002-2 CB 684.
21. IRC § 220(i)(1).