Part III - Archer MSA Distributions

Line 8a

Enter the total distributions you and your spouse received in 2002 from all Archer MSAs. These amounts should be shown in box 1 of Form 1099-MSA.

Line 8b

Include on line 8b any distributions you received in 2002 that were rolled over. See Rollovers below.

Also include any excess contributions (and the earnings on those excess contributions) included on line 8a that were withdrawn by the due date, including extensions, of your return. See the instructions for line 7 beginning on page 3.

Rollovers

A rollover is a tax-free distribution (withdrawal) of assets from one Archer MSA that is reinvested in another. Generally, you must complete the rollover within 60 days following the distribution. See Pub. 590, Individual Retirement Arrangements (IRAs), for more details and additional requirements regarding rollovers.

Note:   If you instruct the trustee of your Archer MSA to transfer funds directly to another Archer MSA, the transfer is not considered a rollover. Do not include the amount transferred in income, deduct it as a contribution, or include it as a distribution on line 8a.

Line 9

In general, include on line 9 distributions from all Archer MSAs in 2002 that were used for the qualified medical expenses (see page 1) of the account holder and his or her spouse or dependents. However, if a contribution was made to an Archer MSA in 2002 (by you or your employer), do not include on line 9 withdrawals from an Archer MSA if the individual for whom the expenses were incurred was not covered by an HDHP or was covered by a plan that was not an HDHP (other than the exceptions listed on page 1) at the time the expenses were incurred.

Example. In 2002, you were covered by an HDHP with self-only coverage and your spouse was covered by a health plan that was not an HDHP. You made contributions to an Archer MSA for 2002. You may not include on line 9 withdrawals made from the Archer MSA to pay your spouse's medical expenses incurred in 2002 because your spouse was covered by a plan that was not an HDHP.

You may not take a deduction on Schedule A (Form 1040) for any amount you include on line 9.

Lines 11a and 11b

Additional 15% Tax

Archer MSA distributions included in income (line 10) are subject to an additional 15% tax unless an exception applies. If any of the following exceptions apply to any of the distributions included on line 10, check the box on line 11a. Enter on line 11b only 15% (.15) of any amount included on line 10 that does not meet any of the exceptions.

Exceptions to the Additional 15% Tax

The additional 15% tax does not apply to distributions made on or after the date that the account holder -

• Dies,
• Becomes disabled (see page 1), or
• Turns age 65.

Example 1. You turned age 66 during the year and had no Archer MSA during the year. Your spouse turned age 63 during the year and received a distribution from an Archer MSA that is included in income. You do not check the box on line 11a because your spouse (the account holder) did not meet the age exception for the distribution. You enter 15% of the amount from line 10 on line 11b.

Example 2. Both you and your spouse received distributions from your Archer MSAs in 2002 that are included in income. You were age 65 at the time you received the distributions and your spouse was age 63 when he or she received the distributions. You check the box on line 11a because the additional 15% tax does not apply to the distributions you received (because you met the age exception). However, the additional 15% tax does apply to your spouse's distributions. You enter on line 11b only 15% of the amount of your spouse's distributions included in line 10.

Example 3. You turned age 65 during the year. You received distributions that are included in income both before and after you turned age 65. You check the box on line 11a because the additional 15% tax does not apply to the distributions you received after you turned age 65. However, the additional 15% tax does apply to the distributions you received before you turned age 65. You enter on line 11b, 15% of the amount of these distributions included in line 10.

Section B - Medicare+Choice MSA Distributions

Complete Section B if you (or your spouse, if filing jointly) received distributions from a Medicare+Choice MSA in 2002. If both you and your spouse received distributions, complete a separate Form 8853, Section B, for each spouse. Write statement across the top of each Form 8853, fill in the name and SSN, and complete Section B. Next, add lines 12, 13, 14, and 15b from the two statement Forms 8853 and enter those totals on the respective lines of the controlling Form 8853 (the combined Form 8853 for both spouses). If either spouse checked the box on line 15a of the statement Form 8853, check the box on the controlling Form 8853. Attach the two statement Forms 8853 to your tax return after the controlling Form 8853.

Medicare+Choice MSA

A Medicare+Choice MSA is an Archer MSA designated as a Medicare+Choice MSA to be used solely to pay the qualified medical expenses of the account holder. To be eligible for a Medicare+Choice MSA, you must be eligible for Medicare and have a HDHP that meets the Medicare guidelines. Contributions to the account may be made only by Medicare. The contributions and any earnings, while in the account, are not taxable to the account holder. A distribution used exclusively to pay for the qualified medical expenses of the account holder is not taxable. Distributions that are not used for qualified medical expenses of the account holder are included in income and also may be subject to a penalty.

Death of Account Holder

If the account holder's surviving spouse is the designated beneficiary, the Medicare+Choice MSA is treated as a regular Archer MSA (not a Medicare+Choice MSA) of the surviving spouse for distribution purposes. Follow the instructions in Section A for Death of Account Holder beginning on page 1.

In all other cases, the account ceases to be an MSA as of the date of death. If you are the beneficiary, complete Form 8853 as follows.

• Write Death of Medicare+Choice MSA account holder across the top of Form 8853.
• Write the name(s) shown on your tax return and your SSN in the spaces provided at the top of the form. Skip Parts I and II.
• On line 12, enter the fair market value of the Medicare+Choice MSA as of the date of death.
• On line 13, enter qualified medical expenses incurred by the account holder before the date of death that you paid within 1 year after the date of death.
• Complete line 14.

The distribution is not subject to the additional 50% tax. Report any earnings on the account after the date of death as income on your tax return.

line 15 additional tax worksheet

Line 12

Enter the total distributions you received in 2002 from all Medicare+Choice MSAs. These amounts should be shown in box 1 of Form 1099-MSA. This amount should not include any erroneous contributions made by Medicare (or any earnings on the erroneous contributions) or any amounts from a trustee-to-trustee transfer from one Medicare+Choice MSA to another Medicare+Choice MSA of the same account holder.

Line 13

Enter the total distributions from all Medicare+Choice MSAs in 2002 that were used for your qualified medical expenses (see page 1).

You may not take a deduction on Schedule A (Form 1040) for any amount you include on line 13.

Lines 15a and 15b

Additional 50% Tax

Medicare+Choice MSA distributions included in income (line 14) may be subject to an additional 50% tax unless one of the following exceptions applies.

Exceptions to the Additional 50% Tax

The additional 50% tax does not apply to distributions made on or after the date that the account holder -

• Dies or
• Becomes disabled.

If either of the exceptions applies to any of the distributions included on line 14, check the box on line 15a. Next, if either of the exceptions applies to all the distributions included on line 14, enter zero on line 15b. Otherwise, complete the worksheet below to figure the amount of the additional 50% tax to enter on line 15b.

Section C - Long-Term Care (LTC) Insurance Contracts

See Filing Requirements for Section C on page 6.

Definitions

Policyholder

The policyholder is the person who owns the proceeds of the LTC insurance contract, life insurance contract, or viatical settlement and also may be the insured individual. The policyholder is required to report the income, even if payment is assigned to a third party or parties. In the case of a group contract, the certificate holder is considered to be the policyholder.

Qualified LTC Insurance Contract

In general, amounts paid under a qualified LTC insurance contract are excluded from your income. However, if you receive per diem payments (defined on page 6), the amount you may exclude is limited.

A qualified LTC insurance contract is a contract issued:

• After December 31, 1996, that meets the requirements of section 7702B, including the requirement that the insured must be a chronically ill individual (defined on page 6) or
• Before January 1, 1997, that met state law requirements for LTC insurance contracts at the time the contract was issued and has not been changed materially.

Per Diem Payments

Per diem payments are payments of a fixed amount made on a periodic basis without regard to actual expenses incurred. Box 3 of Form 1099-LTC should indicate whether payments were per diem payments.

Chronically Ill Individual

A chronically ill individual is someone who has been certified (at least annually) by a licensed health care practitioner as -

• Being unable to perform at least two activities of daily living (ADLs) (eating, toileting, transferring, bathing, dressing, and continence), without substantial assistance from another individual, for at least 90 days, due to a loss of functional capacity or
• Requiring substantial supervision to protect the individual from threats to health and safety due to severe cognitive impairment.

Accelerated Death Benefits

Generally, amounts paid as accelerated death benefits under a life insurance contract or under certain viatical settlements are fully excludable from your gross income if the insured is a terminally ill individual (defined next). Accelerated death benefits paid with respect to an insured individual who is chronically ill generally are excludable from your gross income to the same extent as they would be under a qualified LTC insurance contract.

Terminally Ill Individual

A terminally ill individual is any individual who has been certified by a physician as having an illness or physical condition that may reasonably be expected to result in death within 24 months.

Line 17

Special rules apply in determining the taxable payments if other individuals received per diem payments under a qualified LTC insurance contract or as accelerated death benefits with respect to the insured listed on line 16a. See Multiple Payees on page 7 for details.

Line 20

If you have more than one LTC period, you must separately calculate the taxable amount of the payments received during each LTC period. To do this, complete lines 20 through 28 on separate sections C for each LTC period. Enter the total on line 28 from each separate Section C on the Form 8853 that you attach to your tax return. See the instructions for line 23 on this page for the LTC period.

Line 21

Enter the total accelerated death benefits you received with respect to the insured listed on line 16a. These amounts generally are shown in box 2 of Form 1099-LTC. Include only amounts you received while the insured was a chronically ill individual. Do not include amounts you received while the insured was a terminally ill individual. If the insured was redesignated from chronically ill to terminally ill in 2002, only include on line 21 payments received before the insured was certified as terminally ill.

Line 23

The number of days in your LTC period depends on which method you choose to define the LTC period. Generally, you may choose either the Contract Period method or the Equal Payment Rate method. However, special rules apply if other persons also received per diem payments in 2002 under a qualified LTC insurance contract or as accelerated death benefits with respect to the insured listed on line 16a. See Multiple Payees on this page for details.

Method 1 - Contract Period

Under this method your LTC period is the same period as that used by the insurance company under the contract to compute the benefits it pays you. For example, if the insurance company computes your benefits on a daily basis, your LTC period is 1 day.

If you choose this method for defining the LTC period(s) and different LTC insurance contracts for the same insured use different contract periods, then all such LTC contracts must be treated as computing benefits on a daily basis.

Method 2 - Equal Payment Rate

Under this method, your LTC period is the period during which the insurance company uses the same payment rate to compute your benefits. For example, you have two LTC periods if the insurance contract computes payments at a rate of $175 per day from March 1, 2002, through May 31, 2002, and then at a rate of $195 per day from June 1, 2002, through December 31, 2002. The first LTC period is 92 days (from March 1 through May 31) and the second LTC period is 214 days (from June 1 through December 31).

You may choose this method even if you have more than one qualified LTC insurance contract covering the same period. For example, you have one insurance contract that pays $100 per day from March 1, 2002, through December 31, 2002, and you have a second insurance contract that pays $1,500 per month from March 1, 2002, through December 31, 2002. You have one LTC period because each payment rate does not vary during the LTC period of March 1 through December 31. However, you have two LTC periods if the facts are the same except that the second insurance contract did not begin making payments until May 1, 2002. The first LTC period is 61 days (from March 1 through April 30) and the second LTC period is 245 days (from May 1 through December 31).

Line 24

Qualified LTC services are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal care services required to treat a chronically ill individual under a plan of care prescribed by a licensed health care practitioner.

Line 26

Enter the reimbursements you received or expect to receive through insurance or otherwise for qualified LTC services provided for the insured for LTC periods in 2002. Box 3 of Form 1099-LTC should indicate whether the payments were made on a reimbursement basis.

Generally, do not include on line 26 any reimbursements for qualified LTC services you received under a contract issued before August 1, 1996. However, you must include reimbursements if the contract was exchanged or modified after July 31, 1996, to increase per diem payments or reimbursements.

Multiple Payees

If you checked Yes on lines 17 and 18 and the only payments you received were accelerated death benefits that were paid because the insured was terminally ill, skip lines 19 through 27 and enter zero on line 28.

In all other cases in which you checked Yes on line 17, attach a statement duplicating lines 20 through 28 of the form. This attachment should show the aggregate computation for all persons who received per diem payments under a qualified LTC insurance contract or as accelerated death benefits because the insured was chronically ill. Each person must use the same LTC period. If all the recipients of payments do not agree on which LTC period to use, the contract period method must be used.

After completing the attachment, determine your share of the per diem limitation and any taxable payments. The per diem limitation is allocated first to the insured to the extent of the total payments the insured received. If the insured files a joint return and the insured's spouse is one of the policyholders, the per diem limitation is allocated first to them to the extent of the payments they both received. Any remaining limitation is allocated among the other policyholders pro rata based on the payments they received in 2002.

Enter your share of the per diem limitation and the taxable payments on lines 27 and 28. Leave lines 23 through 26 blank.

filing requirements for section c.

Example 1

Mrs. Smith was chronically ill throughout 2002 and received 12 monthly payments on a per diem basis from a qualified LTC insurance contract. She was paid $2,000 per month ($24,000 total). Mrs. Smith incurred expenses for qualified LTC services of $100 per day ($36,500) and was reimbursed for one-half of those expenses ($18,250). She uses the equal payment rate method and therefore has a single benefit period for 2002 (January 1-December 31). Mrs. Smith completes lines 22 through 28 of Form 8853 as follows.

Line	Amount
22	$24,000 ($2,000 x 12 mos.)
23	$76,650 ($210 x 365 days)
24	$36,500 ($100 x 365 days)
25	$76,650
26	$18,250 ($50 x 365 days)
27	$58,400
28	$-0-

Example 2

The facts are the same as in Example 1, except Mrs. Smith's son, Sam, and daughter, Deborah, each also own a qualified LTC insurance contract under which Mrs. Smith is the insured. Neither Sam nor Deborah incurred any costs for qualified LTC services for Mrs. Smith in 2002. From July 1, 2002, through December 31, 2002, Sam received per diem payments of $2,700 per month ($16,200 total) and Deborah received per diem payments of $1,800 per month ($10,800 total). Mrs. Smith, Sam, and Deborah agree to use the equal payment rate method to determine their LTC periods.

There are two LTC periods. The first is 181 days (from January 1 through June 30) during which the per diem payments were $2,000 per month. The second is 184 days (from July 1 through December 31) during which the aggregate per diem payments were $6,500 per month ($2,000 under Mrs. Smith's contract + $2,700 under Sam's contract + $1,800 under Deborah's contract).

An aggregate statement must be completed for the second LTC period and attached to Mrs. Smith's, Sam's, and Deborah's forms.

Step 1.   They complete a statement for Mrs. Smith for the first LTC period as follows.

Line	Amount
22	$12,000 ($2,000 x 6 mos.)
23	$38,010 ($210 x 181 days)
24	$18,100 ($100 x 181 days)
25	$38,010
26	$9,050 ($50 x 181 days)
27	$28,960
28	$ -0-

Step 2.   They complete the aggregate statement for the second LTC period as follows.

Line	Amount
22	$39,000 ($6,500 x 6 mos.)
23	$38,640 ($210 x 184 days)
24	$18,400 ($100 x 184 days)
25	$38,640
26	$9,200 ($50 x 184 days)
27	$29,440
28	$9,560

Step 3.   They allocate the aggregate per diem limitation of $29,440 on line 27 among Mrs. Smith, Sam, and Deborah. Because Mrs. Smith is the insured, the per diem limitation is allocated first to her to the extent of the per diem payments she received during the second LTC period ($12,000). The remaining per diem limitation of $17,440 is allocated between Sam and Deborah.

Allocation ratio to Sam:   60% of the remaining limitation is allocated to Sam because the $16,200 he received during the second LTC period is 60% of the $27,000 received by both Sam and Deborah during the second LTC period.

Allocation ratio to Deborah:   40% of the remaining limitation is allocated to Deborah because the $10,800 she received during the second LTC period is 40% of the $27,000 received by both Sam and Deborah during the second LTC period.

Step 4.   Mrs. Smith, Sam, and Deborah each complete Form 8853 as follows.

Mrs. Smith's Form 8853:  

Line	1st LTC Period	2nd LTC Period	Form 8853
22	$12,000	$12,000	$24,000
27	$28,960	$12,000	$40,960
28	$ -0-	$-0-	$-0-

Sam's Form 8853:  

Line	1st LTC Period	2nd LTC Period	Form 8853
22	$-0-	$16,200	$16,200
27	$-0-	$10,464	$10,464
28	$-0-	$5,736	$5,736

Deborah's Form 8853:  

Line	1st LTC Period	2nd LTC Period	Form 8853
22	$-0-	$10,800	$10,800
27	$-0-	$6,976	$6,976
28	$-0-	$3,824	$3,824

Paperwork Reduction Act Notice.

We ask for the information on this form to carry out the Internal Revenue laws of the United States. You are required to give us the information. We need it to ensure that you are complying with these laws and to allow us to figure and collect the right amount of tax.

You are not required to provide the information requested on a form that is subject to the Paperwork Reduction Act unless the form displays a valid OMB control number. Books or records relating to a form or its instructions must be retained as long as their contents may become material in the administration of any Internal Revenue law. Generally, tax returns and return information are confidential, as required by section 6103.

The time needed to complete and file this form will vary depending on individual circumstances. The estimated average time is:

Recordkeeping	1 hr., 31 min.
Learning about the law or the form	34 min.
Preparing the form	1 hr., 44 min.
Copying, assembling, and sending the form to the IRS	46 min.

If you have comments concerning the accuracy of these time estimates or suggestions for making this form simpler, we would be happy to hear from you. You can write to the Tax Forms Committee, Western Area Distribution Center, Rancho Cordova, CA 95743-0001. Do not send the form to this address. Instead, see Where Do You File? in the Form 1040 instructions.

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