An Archer MSA is a tax-advantaged savings account for self-employed people and small business owners to set aside money for medical expenses

An Archer Medical Savings Account (Archer MSA) is a savings account paired with a high-deductible health insurance plan. Money you put into it is not taxed, the money grows without being taxed, and withdrawals for medical expenses are not taxed either. The account is only open to self-employed people, business owners with fewer than 50 employees, and certain employees of those businesses.

Archer MSAs were created in 1996 as a pilot program and have remained largely unchanged since then. They are less common than Health Savings Accounts (HSAs), which work similarly but have fewer restrictions and are open to more people. If you are self-employed or own a small business, an Archer MSA may be one way to reduce what you pay in taxes while building a reserve for medical costs.

Key Takeaways

  • Archer MSAs are only open to self-employed people, business owners with fewer than 50 employees, and their employees.
  • You must have a high-deductible health insurance plan to open and fund an Archer MSA.
  • Contributions reduce your taxable income, and withdrawals for medical expenses are tax-free.
  • Money left in the account at the end of the year rolls over and can be used in future years, unlike flexible spending accounts.
  • An HSA may be a better option for most people because it has higher contribution limits and fewer may be able to access restrictions.

Who can open an Archer MSA

You can open an Archer MSA if you are self-employed with net earnings from self-employment, or if you own a business with fewer than 50 employees. Your business can be a sole proprietorship, partnership, S corporation, or C corporation. If you are an employee of a business that offers Archer MSAs, you may be able to open one through your employer, though this is rare.

You cannot open an Archer MSA if you are covered by any health insurance other than the high-deductible plan paired with the account. This means you cannot have coverage through a spouse's employer plan, Medicare, Medicaid, or TRICARE. If you have any other health coverage, you are not may be able to access, even if that coverage is secondary.

The IRS limits the total number of Archer MSAs that can exist. Once the limit is reached, no new accounts can be opened, though existing accounts can continue to receive contributions. As of recent years, this limit has not been reached, but it is a rule that could affect future availability.

High-deductible health plan requirements

Your health insurance plan must meet specific requirements to may have access to for an Archer MSA. The deductible must be at least $2,850 for individual coverage or $5,700 for family coverage in 2024 (these amounts change yearly). The plan's out-of-pocket maximum cannot exceed $7,050 for individual coverage or $14,100 for family coverage in 2024.

The plan must cover preventive care without requiring you to meet the deductible first. This means services like vaccinations, screenings, and certain preventive treatments are covered at no cost to you. The plan does not have to cover anything else until you meet the deductible.

You must have the high-deductible plan in place before you can open the Archer MSA, and you must maintain it for the entire year you want to make contributions. If you drop the coverage or switch to a different plan mid-year, you may not be able to contribute for that year.

Contribution limits and how money flows in

The amount you can contribute to an Archer MSA depends on your insurance coverage type and changes each year. For 2024, the limit is 65 percent of your plan's deductible for individual coverage or 75 percent of the deductible for family coverage. If your deductible is $2,850, you can contribute up to $1,852.50 for individual coverage.

You can contribute money yourself, your employer can contribute on your behalf, or both can contribute — but the total cannot exceed the annual limit. Contributions are made with pre-tax dollars, which means they reduce your taxable income for the year. If you are self-employed, you deduct contributions on your tax return. If you are an employee, your employer withholds contributions from your paycheck before taxes are calculated.

Contributions must be made by the tax filing deadline for that year, usually April 15 of the following year. If you open an Archer MSA mid-year, you can contribute a prorated amount based on the number of months you were may be able to access.

How withdrawals work and what counts as a medical expense

You can withdraw money from your Archer MSA at any time for any reason. However, withdrawals for non-medical expenses are taxed as ordinary income and subject to a 20 percent penalty if you are under age 65. Withdrawals for medical expenses are tax-free and penalty-free at any age.

Medical expenses that count include doctor visits, prescription medications, dental work, vision care, mental health treatment, and hospital stays. They also include medical equipment like crutches or wheelchairs, and some over-the-counter items like bandages and pain relievers. Expenses for your spouse and dependents count as well, even if they are not covered by your health insurance plan.

You do not have to withdraw money in the same year you incur the expense. You can pay a medical bill out of pocket and withdraw money from the account later to reimburse yourself. You can also let the money sit in the account and withdraw it years later, as long as you have documentation of the original expense.

How an Archer MSA differs from an HSA

Health Savings Accounts (HSAs) work much like Archer MSAs — both are paired with high-deductible plans, both offer tax-free contributions and withdrawals for medical expenses, and both let unused money roll over year to year. However, HSAs are open to far more people and have higher contribution limits.

HSAs are open to anyone with a high-deductible health plan, whether you are self-employed, work for a large employer, or buy coverage on your own. HSA contribution limits are higher: $4,150 for individual coverage and $8,300 for family coverage in 2024. HSAs also allow you to invest the money in stocks and bonds, whereas Archer MSAs typically only offer savings accounts or money market funds.

Because HSAs are more flexible and have fewer restrictions, most people who have a choice between the two choose an HSA. Archer MSAs remain an option mainly for self-employed people and small business owners who opened them years ago and want to keep them, or for those in rare situations where an HSA is not available.

What happens to the money if you change jobs or retire

If you stop being self-employed or your business grows to 50 or more employees, you can no longer contribute to an Archer MSA. However, the money already in the account stays there and continues to grow tax-free. You can continue to withdraw it for medical expenses without penalty or tax.

If you become may be able to access for Medicare, you can no longer make contributions to an Archer MSA. The money in the account can still be used for Medicare premiums, deductibles, and other may have access to medical expenses. After age 65, withdrawals for non-medical expenses are taxed as ordinary income but are not subject to the 20 percent penalty.

If you die, the money in your Archer MSA goes to your estate or beneficiary according to your will or the account's beneficiary designation. If the beneficiary is your spouse, they can treat the account as their own. If the beneficiary is anyone else, the account is closed and the balance is taxed as ordinary income.

Frequently Asked Questions

Can I have both an Archer MSA and an HSA at the same time?

No. You can have one or the other, but not both in the same year. If you switch from an Archer MSA to an HSA, you can keep the money in the Archer MSA and continue to use it for medical expenses, but you cannot make new contributions to it.

What if I do not use all the money in my Archer MSA in a given year?

The money rolls over to the next year with no limit on how much can accumulate. Unlike flexible spending accounts, there is no "use it or lose it" rule. You can let the balance grow for years and withdraw it whenever you need it for medical expenses.

Can I use my Archer MSA to pay for health insurance premiums?

You can use it to pay for COBRA continuation coverage, Medicare premiums, and long-term care insurance premiums. You cannot use it to pay for your regular health insurance premiums while you are working, but you can use it for premiums after you retire or become unemployed.

Do I have to report my Archer MSA on my tax return?

Yes. You report contributions on your tax return to claim the deduction, and you report withdrawals if they are for non-medical expenses. The financial institution holding your account sends you a Form 8853 each year showing contributions and withdrawals, which you attach to your return.

What if I withdraw money and later find out the expense does not count as medical?

The withdrawal is treated as a non-medical expense, meaning it is taxed as ordinary income and subject to the 20 percent penalty. You cannot undo the withdrawal, but you can put money back into the account in future years through regular contributions to rebuild the balance.