Revenue Code 220: Tax Rules for Archer MSAs

Internal Revenue Code Section 220 established the Archer Medical Savings Account (MSA), a tax-exempt trust or custodial account set up to pay for medical expenses for individuals covered by a high-deductible health plan (HDHP). These accounts were introduced as part of a pilot program that began in 1997. The ability to establish new Archer MSAs ended after 2007, and they have been largely superseded by Health Savings Accounts (HSAs). The rules governing these accounts were designed to give self-employed individuals and employees of small businesses a way to save for medical costs with tax benefits.

Eligibility for an Archer MSA

To have qualified for an Archer MSA, an individual had to meet specific criteria centered on their employment and health insurance coverage. The primary requirement was being either a self-employed person or an employee of a “small employer.” A small employer was defined as one that had an average of 50 or fewer employees during either of the two preceding calendar years.

Beyond the employment status, the individual was required to be covered by a high-deductible health plan (HDHP). This plan had to meet certain minimum and maximum deductible amounts and out-of-pocket expense limits. For 2025, an HDHP for self-only coverage must have a deductible between $2,850 and $4,300, with a maximum out-of-pocket limit of $5,700. For family coverage in 2025, the deductible must be between $5,700 and $8,550, with an out-of-pocket maximum of $10,500.

A further condition was that the individual could not have any other health insurance coverage, which ensured the MSA was paired exclusively with the HDHP. There were, however, permitted exceptions. An individual could still be eligible while having separate insurance for:

• Disability
• Dental care
• Vision care
• Long-term care

Contribution Rules and Limits

Contributions could be made by either the account holder or their employer, but a rule stipulated that contributions from both were not permitted in the same tax year. If an employer made a contribution to an employee’s Archer MSA, that employee could not make their own deductible contribution for that year.

Annual contribution limits are determined as a percentage of the deductible associated with the high-deductible health plan. For an individual with self-only coverage, the maximum contribution is 65% of the annual plan deductible. For those with family coverage, the limit is 75% of the annual deductible; for instance, if a family plan has a deductible of $6,000, the maximum annual MSA contribution would be $4,500. Contributions made by the account holder are an “above-the-line” deduction, which means the taxpayer can deduct the amount from their gross income without itemizing. Any contributions exceeding the annual limit are not deductible and are subject to a 6% excise tax.

Tax Treatment of Distributions

The tax consequences of withdrawing funds from an Archer MSA depend on how the money is used. Distributions taken to pay for qualified medical expenses are completely tax-free and penalty-free. “Qualified medical expenses” are broadly defined in IRS Publication 502, Medical and Dental Expenses, and include costs for diagnosis, treatment, or prevention of disease.

If a distribution is taken for any reason other than to pay for qualified medical expenses, it is a non-qualified distribution. The entire amount of a non-qualified distribution must be included in the account holder’s gross income for the year and is subject to ordinary income tax. These distributions are also subject to a 20% penalty tax.

There are specific situations where the 20% penalty on non-qualified distributions does not apply. The penalty is waived for distributions made after the account holder turns 65, becomes disabled, or dies. In the case of death, the funds can be withdrawn by a beneficiary without the penalty, although income tax may still apply depending on who the beneficiary is.

Reporting Requirements for Archer MSAs

Taxpayers use Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, to report contributions, calculate their allowable MSA deduction, and account for any distributions taken during the tax year.

When filling out Form 8853, the taxpayer provides details on contributions they made, as well as any contributions made by their employer. Employer contributions are reported on the employee’s Form W-2 in box 12 with the code R. The form guides the taxpayer through the calculation of their maximum deduction based on their HDHP coverage.

The form is also used to report total distributions received from the account, which are initially reported to the taxpayer by the financial institution on Form 1099-SA. On Form 8853, the taxpayer then separates these distributions into amounts used for qualified medical expenses and amounts taken for other purposes. This determines if any portion of the distribution is taxable and subject to the 20% penalty. The completed Form 8853 is attached to the individual’s annual Form 1040 tax return.