An Archer Medical Savings Account (MSA) is a specialized tax-advantaged savings account designed primarily for self-employed individuals and small businesses with high-deductible health plans (HDHPs). Introduced under the Health Insurance Portability and Accountability Act (HIPAA) of 1996, Archer MSAs aim to help account holders save pre-tax dollars to pay for qualified medical expenses while reducing overall healthcare costs.
Eligibility and Purpose
To open an Archer MSA, you must be either self-employed or work for a small business typically with 50 or fewer employees. Additionally, you must be covered by a high-deductible health plan, which is a type of health insurance with higher deductibles and lower premiums compared to traditional plans. The eligibility criteria make this a more exclusive option compared to the newer Health Savings Account (HSA), which has broader availability.
How Archer MSAs Work
Account holders or their employers contribute funds to the Archer MSA, with contributions made on a pre-tax basis. The IRS determines annual contribution limits, which are generally capped at 65% of the annual deductible for individual coverage or 75% for family coverage, never exceeding the deductible itself. These limits are adjusted annually for inflation.
The money in the Archer MSA grows tax-free and can be used to pay for a wide range of qualified medical expenses, such as:
- Doctor visits
- Prescription medications
- Hospital stays
- Certain medical treatments and supplies
Withdrawals made for qualified medical expenses are not subject to federal income tax or penalties. Unused funds roll over year to year, allowing account holders to build savings for future healthcare costs.
Comparing Archer MSAs and Health Savings Accounts (HSAs)
While Archer MSAs were pioneering health savings accounts, they have been largely supplanted by HSAs since their introduction in 2003. HSAs generally offer more flexibility, higher contribution limits, and are available to a broader audience.
Key differences include:
- Archer MSAs are limited to self-employed individuals and small businesses, while HSAs are available to most individuals with HDHPs.
- HSAs allow for higher annual contributions.
- Archer MSAs have more restrictive rules and are less widely offered by employers.
For more detailed insights, see our Health Savings Account (HSA) page.
Important Considerations and Tips
- Keep thorough records of all medical expenses paid from the MSA, as the IRS may request documentation to verify qualified expenses.
- Withdrawals for non-qualified expenses are subject to income tax and a 15% penalty, emphasizing the importance of careful expense tracking.
- Unused balances roll over, so funds are not lost at year-end.
- Contributions cannot exceed IRS limits, including both employee and employer deposits combined.
Frequently Asked Questions
Can I contribute to both an Archer MSA and an HSA in the same year? No, IRS rules prohibit contributing to both accounts simultaneously due to overlapping eligibility requirements.
What happens if I lose my high-deductible health plan coverage? You can keep and use your Archer MSA funds tax-free for qualified expenses, but you cannot make new contributions once you lose HDHP coverage.
Can employers contribute to my Archer MSA? Yes, employers can contribute, but total annual contributions must stay within the IRS-established limits.
Summary Table: Archer MSA Key Features
| Feature | Details |
|---|---|
| Eligibility | Self-employed individuals and small businesses (≤50 employees) |
| Insurance Requirement | Must have a high-deductible health plan (HDHP) |
| Contribution Limits | Up to 65% of individual deductible, 75% for family coverage, capped at deductible amount |
| Tax Benefits | Contributions and qualified withdrawals are federal income tax-free |
| Use of Funds | Qualified medical expenses only (qualified medical expenses) |
| Account Rollover | Unused funds roll over year to year |
| Common Replacement | Mostly replaced by Health Savings Accounts (HSA) |
Resources and References
- IRS Publication 969 – Health Savings Accounts and Other Tax-Favored Health Plans provides official IRS guidance on Archer MSAs.
- Learn more about your health plan options at the Consumer Financial Protection Bureau (CFPB).
- For an overview of tax-advantaged medical accounts, see the Investopedia Archer MSA article.
Archer Medical Savings Accounts represent a valuable but now less common option for tax-advantaged medical savings, primarily benefiting small business owners and self-employed individuals with qualifying high-deductible health plans. If eligible, understanding how MSAs work can help you strategically manage healthcare costs and take advantage of federal tax benefits.