Merritt Personal Lines Manual: Distributions From an MSA

You will generally pay medical expenses during the year without being reimbursed by your HDHP until you reach the annual deductible for the plan. When you pay medical expenses during the year that are not reimbursed by your HDHP, you can ask the trustee of your Archer MSA to send you a distribution from your Archer MSA.

You can receive tax-free distributions from your Archer MSA to pay for qualified medical expenses (discussed later). If you receive distributions for other reasons, the amount will be subject to income tax and may be subject to an excise tax as well. You do not have to make withdrawals from your Archer MSA each year.

If you no longer qualify to make contributions, you can still receive tax-free distributions to pay or reimburse your qualified medical expenses.

A distribution is money you get from your Archer MSA. The trustee will report any distribution to you and the IRS on Form 1099-SA, Distributions From an HSA, Archer MSA, or Medicare Advantage MSA.

Qualified medical expenses. Qualified medical expenses are those expenses that would generally qualify for the medical and dental expenses deduction. These are explained in Publication 502, Medical and Dental Expenses. Examples include amounts paid for doctors' fees, prescription and non-prescription medicines, and necessary hospital services not paid for by insurance. Qualified medical expenses are those incurred by the following persons.

1. Yourself and your spouse.
2. All dependents you claim on your tax return.
3. Any person you could have claimed as a dependent on your return except that:
4. The person filed a joint return,
5. The person had gross income of $3,300 or more, or
6. You, or your spouse if filing jointly, could be claimed as a dependent on someone else's 2006 return

You cannot deduct qualified medical expenses as an itemized deduction on Schedule A (Form 1040) that are equal to the tax-free distribution from your Archer MSA. This is the amount on line 9 of Form 8853.

Special rules for insurance premiums. Generally, you cannot treat insurance premiums as qualified medical expenses for Archer MSAs. You can, however, treat premiums for long-term care coverage, health care coverage while you receive unemployment benefits, or health care continuation coverage required under any federal law as qualified medical expenses for Archer MSAs.

Health coverage tax credit. You cannot claim this credit for premiums that you pay with a tax-free distribution from your Archer MSA. See Publication 502 for information on this credit.

Deemed distributions from Archer MSAs. The following situations result in deemed taxable distributions from your Archer MSA.

• You engaged in any transaction prohibited by section 4975 with respect to any of your Archer MSAs, at any time in 2006. Your account ceases to be an Archer MSA as of January 1, 2006, and you must include the fair market value of all assets in the account as of January 1, 2006, on line 8a of Form 8853.
• You used any portion of any of your Archer MSAs as security for a loan at any time in 2006. You must include the fair market value of the assets used as security for the loan as income on Form 1040, line 21.

Records you should keep

Recordkeeping. You must keep records sufficient to show that:

• The distributions were exclusively to pay or reimburse qualified medical expenses,
• The qualified medical expenses had not been previously paid or reimbursed from another source, and
• The medical expenses had not been taken as an itemized deduction in any year.

Do not send these records with your tax return. Keep them with your tax records.

Reporting Distributions on Your Return

How you report your distributions depends on whether or not you use the distribution for qualified medical expenses (defined earlier).

• If you use a distribution from your Archer MSA for qualified medical expenses, you do not pay tax on the distribution but you have to report the distribution on Form 8853. Follow the instructions for the form and file it with your Form 1040.
• If you do not use a distribution from your Archer MSA for qualified medical expenses, you must pay tax on the distribution. Report the amount on Form 8853 and file it with your Form 1040. If you have a taxable Archer MSA distribution, include it in the total on Form 1040, line 21, and enter "MSA" and the amount on the dotted line next to line 21. You may have to pay an additional tax on your taxable distribution.

If an amount (other than a rollover) is contributed to your Archer MSA this year (by you or your employer), you also must report and pay tax on a distribution you receive from your Archer MSA this year that is used to pay medical expenses of someone who is not covered by an HDHP, or is also covered by another health plan that is not an HDHP, at the time the expenses are incurred. See the instructions for Form 8853 for more information.

Rollovers. Generally, any distribution from an Archer MSA that you roll over into another Archer MSA or an HSA is not taxable if you complete the rollover within 60 days. You can make only one rollover contribution to an Archer MSA during a 1-year period. See the instructions for Form 8853 for more information.

Additional tax. There is a 15% additional tax on the part of your distributions not used for qualified medical expenses. Figure the tax on Form 8853 and file it with your Form 1040. Report the additional tax on Form 1040, line 63, and enter "MSA" and the amount on the dotted line next to line 63.

Exceptions. There is no additional tax on distributions made after the date you are disabled, reach age 65, or die.