§ 220. Archer MSAs
(a)
Deduction allowed
In the case of an individual who is an eligible individual for any month during the taxable year, there shall be allowed as a deduction for the taxable year an amount equal to the aggregate amount paid in cash during such taxable year by such individual to an Archer MSA of such individual.
(b)
Limitations
(1)
In general
The amount allowable as a deduction under subsection (a) to an individual for the taxable year shall not exceed the sum of the monthly limitations for months during such taxable year that the individual is an eligible individual.
(2)
Monthly limitation
The monthly limitation for any month is the amount equal to 1/12 of—
(3)
Special rule for married individuals
In the case of individuals who are married to each other, if either spouse has family coverage—
(4)
Deduction not to exceed compensation
(A)
Employees
The deduction allowed under subsection (a) for contributions as an eligible individual described in subclause (I) of subsection (c)(1)(A)(iii) shall not exceed such individual’s wages, salaries, tips, and other employee compensation which are attributable to such individual’s employment by the employer referred to in such subclause.
(B)
Self-employed individuals
The deduction allowed under subsection (a) for contributions as an eligible individual described in subclause (II) of subsection (c)(1)(A)(iii) shall not exceed such individual’s earned income (as defined in section
401
(c)(1)) derived by the taxpayer from the trade or business with respect to which the high deductible health plan is established.
(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—
(6)
Denial of deduction to dependents
No deduction shall be allowed under this section to any individual with respect to whom a deduction under section
151 is allowable to another taxpayer for a taxable year beginning in the calendar year in which such individual’s taxable year begins.
(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—
(ii)
such individual is not, while covered under a high deductible health plan, covered under any health plan—
(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.
(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,
(3)
Permitted insurance
The term “permitted insurance” means—
(4)
Small employer
(A)
In general
The term “small employer” means, with respect to any calendar year, any employer if such employer employed an average of 50 or fewer employees on business days during either of the 2 preceding calendar years. For purposes of the preceding sentence, a preceding calendar year may be taken into account only if the employer was in existence throughout such year.
(B)
Employers not in existence in preceding year
In the case of an employer which was not in existence throughout the 1st preceding calendar year, the determination under subparagraph (A) shall be based on the average number of employees that it is reasonably expected such employer will employ on business days in the current calendar 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
(D)
Special rules
(i)
Controlled groups
For purposes of this paragraph, all persons treated as a single employer under subsection (b), (c), (m), or (o) of section
414 shall be treated as 1 employer.
(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—
(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.
(2)
Qualified medical expenses
(A)
In general
The term “qualified medical expenses” means, with respect to an account holder, amounts paid by such holder for medical care (as defined in section
213
(d)) for such individual, the spouse of such individual, and any dependent (as defined in section
152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof) of such individual, but only to the extent such amounts are not compensated for by insurance or otherwise. Such term shall include an amount paid for medicine or a drug only if such medicine or drug is a prescribed drug (determined without regard to whether such drug is available without a prescription) or is insulin.
(B)
Health insurance may not be purchased from account
(C)
Medical expenses of individuals who are not eligible individuals
Subparagraph (A) shall apply to an amount paid by an account holder for medical care of an individual who is not described in clauses (i) and (ii) of subsection (c)(1)(A) for the month in which the expense for such care is incurred only if no amount is contributed (other than a rollover contribution) to any Archer MSA of such account holder for the taxable year which includes such month. This subparagraph shall not apply to any expense for coverage described in subclause (I) or (III) of subparagraph (B)(ii).
(3)
Account holder
The term “account holder” means the individual on whose behalf the Archer MSA was established.
(e)
Tax treatment of accounts
(1)
In general
An Archer MSA is exempt from taxation under this subtitle unless such account has ceased to be an Archer MSA. Notwithstanding the preceding sentence, any such account is subject to the taxes imposed by section
511 (relating to imposition of tax on unrelated business income of charitable, etc. organizations).
(f)
Tax treatment of distributions
(1)
Amounts used for qualified medical expenses
Any amount paid or distributed out of an Archer MSA which is used exclusively to pay qualified medical expenses of any account holder shall not be includible in gross income.
(2)
Inclusion of amounts not used for qualified medical expenses
Any amount paid or distributed out of an Archer MSA which is not used exclusively to pay the qualified medical expenses of the account holder shall be included in the gross income of such holder.
(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.
(4)
Additional tax on distributions not used for qualified medical expenses
(A)
In general
The tax imposed by this chapter on the account holder for any taxable year in which there is a payment or distribution from an Archer MSA of such holder which is includible in gross income under paragraph (2) shall be increased by 20 percent of the amount which is so includible.
(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
Paragraph (2) shall not apply to any amount paid or distributed from an Archer MSA to the account holder to the extent the amount received is paid into an Archer MSA or a health savings account (as defined in section
223
(d)) for the benefit of such holder not later than the 60th day after the day on which the holder receives the payment or distribution.
(B)
Limitation
This paragraph shall not apply to any amount described in subparagraph (A) received by an individual from an Archer MSA if, at any time during the 1-year period ending on the day of such receipt, such individual received any other amount described in subparagraph (A) from an Archer MSA which was not includible in the individual’s gross income because of the application of this paragraph.
(6)
Coordination with medical expense deduction
For purposes of determining the amount of the deduction under section
213, any payment or distribution out of an Archer MSA for qualified medical expenses shall not be treated as an expense paid for medical care.
(7)
Transfer of account incident to divorce
The transfer of an individual’s interest in an Archer MSA to an individual’s spouse or former spouse under a divorce or separation instrument described in subparagraph (A) of section
71
(b)(2) shall not be considered a taxable transfer made by such individual notwithstanding any other provision of this subtitle, and such interest shall, after such transfer, be treated as an Archer MSA with respect to which such spouse is the account holder.
(8)
Treatment after death of account holder
(A)
Treatment if designated beneficiary is spouse
If the account holder’s surviving spouse acquires such holder’s interest in an Archer MSA by reason of being the designated beneficiary of such account at the death of the account holder, such Archer MSA shall be treated as if the spouse were the account holder.
(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—
(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
The amount includible in gross income under clause (i) by any person (other than the estate) shall be reduced by the amount of qualified medical expenses which were incurred by the decedent before the date of the decedent’s death and paid by such person within 1 year after such date.
(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—
(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 1992” in subparagraph (B) 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
The Secretary may require the trustee of an Archer MSA to make such reports regarding such account to the Secretary and to the account holder with respect to contributions, distributions, and such other matters as the Secretary determines appropriate. The reports required by this subsection shall be filed at such time and in such manner and furnished to such individuals at such time and in such manner as may be required by the Secretary.
(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—
(3)
Active MSA participant
For purposes of this subsection—
(A)
In general
The term “active MSA participant” means, with respect to any taxable year, any individual who is the account holder of any Archer MSA into which any contribution was made which was excludable from gross income under section
106
(b), or allowable as a deduction under this section, for such taxable year.
(B)
Special rule for cut-off years before 2007
In the case of a cut-off year before 2007—
(C)
Cut-off date
For purposes of subparagraph (B)—
(i)
In general
Except as otherwise provided in this subparagraph, the cut-off date is October 1 of the cut-off year.
(ii)
Employees with enrollment periods after October 1
In the case of an individual described in subclause (I) of subsection (c)(1)(A)(iii), if the regularly scheduled enrollment period for health plans of the individual’s employer occurs during the last 3 months of the cut-off year, the cut-off date is December 31 of the cut-off year.
(iii)
Self-employed individuals
In the case of an individual described in subclause (II) of subsection (c)(1)(A)(iii), the cut-off date is November 1 of the cut-off year.
(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—
(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
(B)
Alternative computation of limitation
The numerical limitation for 1998, 1999, 2001, 2002, 2004, 2005, or 2006 is also exceeded if the sum of—
(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.
(3)
Previously uninsured individuals not included in determination
(A)
In general
The determination of whether any calendar year is a cut-off year shall be made by not counting the Archer MSA of any previously uninsured individual.
(B)
Previously uninsured individual
For purposes of this subsection, the term “previously uninsured individual” means, with respect to any Archer MSA, any individual who had no health plan coverage (other than coverage referred to in subsection (c)(1)(B)) at any time during the 6-month period before the date such individual’s coverage under the high deductible health plan commences.
(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—
(B)
Additional report for 1997
Not later than June 1, 1997, each person who is the trustee of an Archer MSA established before May 1, 1997, shall make an additional report described in subparagraph (A) but only with respect to accounts established before May 1, 1997.
(C)
Penalty for failure to file report
(D)
Aggregation of accounts
To the extent practicable, in determining the number of Archer MSAs on the basis of the reports under this paragraph, all Archer MSAs of an individual shall be treated as 1 account and all accounts of individuals who are married to each other shall be treated as 1 account.