Archer MSA vs HSA: Key Differences, Benefits, and Rules

Health savings accounts have become a tool for managing medical expenses and optimizing tax advantages. Among the options available, Archer Medical Savings Accounts (MSAs) and Health Savings Accounts (HSAs) stand out due to their unique features and benefits.

Core Distinctions in Account Structures

Archer MSAs and HSAs are both designed to assist with medical expenses but differ significantly in structure. Archer MSAs, established under the Health Insurance Portability and Accountability Act of 1996, were intended for self-employed individuals and employees of small businesses. These accounts are now largely obsolete, as HSAs, introduced by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, have become the more accessible and flexible option.

A major difference lies in contribution limits. Archer MSAs have restrictive limits, tied to a percentage of the individual’s annual deductible, while HSAs allow higher, inflation-adjusted contributions. For 2024, HSA contribution limits are $3,850 for individuals and $7,750 for families, with an extra $1,000 allowed for those 55 and older.

Rollover provisions also set the two accounts apart. Archer MSAs lack the flexibility of HSAs, which allow funds to roll over year after year without penalty. This feature makes HSAs a more attractive long-term savings vehicle for healthcare expenses.

Eligibility Requirements

Archer MSAs were designed for self-employed individuals and employees of small businesses with 50 or fewer employees, limiting their accessibility and contributing to their decline in popularity.

HSAs, by contrast, offer broader eligibility. To qualify, individuals must be enrolled in a high-deductible health plan (HDHP). For 2024, an HDHP must have a deductible of at least $1,600 for individuals and $3,200 for families, with out-of-pocket maximums capped at $8,050 for individuals and $16,100 for families. These thresholds are adjusted annually for inflation.

Unlike Archer MSAs, HSAs impose no restrictions based on employer size, making them available to employees of large corporations, small businesses, and self-employed individuals alike. This inclusivity has made HSAs the more widely used option.

Contribution Procedures

Archer MSAs permit contributions from either the individual or the employer, but not both in the same year. Employer contributions are excluded from taxable income, while individual contributions are deductible. The maximum contribution is typically limited to 75% of the annual deductible for individual coverage.

HSAs, on the other hand, allow contributions from both employers and employees within the same year. Employer contributions are excluded from gross income, and individual contributions are deductible, even without itemizing on a tax return. For 2024, contribution limits are $3,850 for individuals and $7,750 for families, with an additional $1,000 catch-up contribution for those aged 55 and older. These higher limits enable significant fund accumulation over time.

Tax Rules

For Archer MSAs, contributions made by the account holder are tax-deductible, while employer contributions are excluded from taxable income. Account earnings grow tax-free, and withdrawals for qualified medical expenses are also tax-exempt. Non-qualified withdrawals face income tax and a 15% penalty unless the account holder is 65 or older, disabled, or deceased.

HSAs offer similar tax benefits but with more flexibility. Contributions are either pre-tax if made through payroll deductions or tax-deductible if made directly. Funds grow tax-free, and withdrawals for qualified medical expenses are not taxed. For account holders 65 or older, non-qualified withdrawals are taxable as income but exempt from penalties.

Withdrawals and Eligible Expenses

Archer MSA withdrawals are tax-free if used for qualified medical expenses, which include doctor visits, prescription medications, and certain medical equipment. Non-qualified withdrawals incur income tax and a 15% penalty unless the account holder is 65 or older, disabled, or deceased.

HSAs also allow tax-free withdrawals for qualified medical expenses but cover a broader range of situations. Funds can be withdrawn for medical costs incurred by the account holder, their spouse, or dependents, even if those individuals are not covered under the HDHP. For account holders 65 or older, non-qualified withdrawals are taxable as income but not penalized.

Moving Between Accounts

Transitioning from an Archer MSA to an HSA is possible through a one-time rollover, permitted under Internal Revenue Code Section 220(f)(5). To qualify, the individual must meet HSA eligibility requirements, including enrollment in a high-deductible health plan. The rollover amount does not count toward the annual HSA contribution limit.

However, rolling over HSA funds into an Archer MSA is not allowed. This reflects the legislative intent to phase out MSAs in favor of HSAs. Rollover transactions must be completed within 60 days to avoid tax penalties, and funds should be transferred directly between financial institutions to ensure the process is treated as a rollover, not a taxable distribution.