To be eligible for an Archer MSA, you (or your spouse) must be an employee of a small employer or be self-employed. You (or your spouse) must be covered under a high deductible health plan (HDHP) and have no other health coverage except permitted coverage. You must not be enrolled in Medicare and cannot be claimed as a dependent on someone else's 2006 tax return. You must be an eligible individual on the first day of a month to take an Archer MSA deduction for that month.

A small employer is generally an employer who had an average of 50 or fewer employees during either of the last 2 calendar years. See Pub. 969 for details.

Generally, an Archer MSA is a medical savings account set up exclusively for paying the qualified medical expenses of the account holder or the account holder's spouse or dependent(s).

Generally, qualified medical expenses for Archer MSA purposes are unreimbursed medical expenses that could otherwise be deducted on Schedule A (Form 1040). See the Instructions for Schedule A and Pub. 502, Medical and Dental Expenses (Including the Health Coverage Tax Credit). However, you cannot treat insurance premiums as qualified medical expenses unless the premiums are for:

An HDHP is a health plan that meets the following requirements.

If you have an Archer MSA, you (and your spouse, if you have family coverage) cannot have any health coverage other than an HDHP. But your spouse can have health coverage other than an HDHP if you are not covered by that plan.

An individual generally is considered disabled if he or she is unable to engage in any substantial gainful activity due to a physical or mental impairment which can be expected to result in death or to continue indefinitely.

If the account holder's surviving spouse is the designated beneficiary, the Archer MSA is treated as if the surviving spouse were the account holder. The surviving spouse completes Form 8853 as though the Archer MSA belonged to him or her.

If the designated beneficiary is not the account holder's surviving spouse, or there is no designated beneficiary, the account ceases to be an Archer MSA as of the date of death. The beneficiary completes Form 8853 as follows.

If the account holder's estate is the beneficiary, the value of the Archer MSA as of the date of death is included in the account holder's final income tax return. Complete Form 8853 as described above, except you should complete Part II, if applicable.

The distribution is not subject to the additional 15% tax. Report any earnings on the account after the date of death as income on your tax return.

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

Any deemed distribution will not be treated as used to pay qualified medical expenses. Generally, these distributions are subject to the additional 15% tax.

If an employer made contributions to your Archer MSA, you are not entitled to a deduction. If you and your spouse are covered under an HDHP with family coverage and an employer made contributions to either of your Archer MSAs, neither you nor your spouse are allowed to make deductible contributions to an Archer MSA. If you and your spouse each have an Archer MSA with self-only coverage and only one of you received employer contributions to an Archer MSA, the other spouse is allowed to make deductible contributions to an Archer MSA.

Employer contributions include any amount an employer contributes to any Archer MSA for you or your spouse for 2006. These contributions should be shown in box 12 of Form W-2 with code R. If your employer made excess contributions, you may have to report the excess as income. See Excess Employer Contributions on page 4 for details.

More than one HDHP.   If you and your spouse had more than one HDHP on the first of the month and one of the plans provides family coverage, use the Family coverage rules on the chart and disregard any plans with self-only coverage. If you and your spouse both have HDHPs with family coverage on the first of the month, you both are treated as having only the family coverage plan with the lowest annual deductible.

Married filing separately.   If you have an HDHP with family coverage and are married filing separately, enter only 37.5% (.375) (one-half of 75%) of the annual deductible on the worksheet; or, if you and your spouse agree to divide the 75% of the annual deductible in a different manner, enter your share.

Compensation includes wages, salaries, professional fees, and other pay you receive for services you perform. It also includes sales commissions, commissions on insurance premiums, pay based on a percentage of profits, tips, and bonuses. Generally, these amounts are included on the Form(s) W-2 you receive from your employer(s). Compensation also includes net earnings from self-employment, but only for a trade or business in which your personal services are a material income-producing factor. This is your income from self-employment minus expenses (including the one-half of self-employment tax deduction). Generally, net earnings and self-employment tax deduction are shown on the Schedule SE (Form 1040) you complete for your business or farm. Compensation does not include any amounts received as a pension or annuity and does not include any amount received as deferred compensation.

To figure your excess contributions, subtract your deductible contributions (line 7) from your actual contributions (line 4). However, you can withdraw some or all of your excess contributions for 2006 and they will be treated as if they had not been contributed if:

Excess employer contributions are the excess, if any, of your employer's contributions over the smaller of (a) your limitation on line 5, or (b) your compensation from the employer(s) who maintained your HDHP (line 6). If the excess was not included in income on Form W-2, you must report it as “Other income” on your tax return. However, you can withdraw some or all of the excess employer contributions for 2006 and they will be treated as if they had not been contributed if:

A rollover is a tax-free distribution (withdrawal) of assets from one Archer MSA that is reinvested in another Archer MSA or a health savings account. Generally, you must complete the rollover within 60 days following the distribution. You can make only one rollover contribution to an Archer MSA during a 1-year period. See Pub. 590, Individual Retirement Arrangements (IRAs), for more details and additional requirements regarding rollovers.

Example.   In 2006, 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 2006. You cannot include on line 9 withdrawals made from the Archer MSA to pay your spouse's medical expenses incurred in 2006 because your spouse was covered by a plan that was not an HDHP.

Archer MSA distributions included in income (line 10) are subject to an additional 15% tax unless one of the following exceptions apply.

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

If any of the 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.

Example 1.   You turned age 66 in 2006 and had no Archer MSA during 2006. Your spouse turned age 63 in 2006 and received a distribution from an Archer MSA that is included in income. Do not check the box on line 11a because your spouse (the account holder) did not meet the age exception for the distribution. 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 2006 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. 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. Enter on line 11b only 15% of the amount of your spouse's distributions included in line 10.

Example 3.    You turned age 65 in 2006. You received distributions that are included in income both before and after you turned age 65. Check the box on line 11a because the additional 15% tax does not apply to the distributions made after the date you turned age 65. However, the additional 15% tax does apply to the distributions made on or before the date you turned age 65. Enter on line 11b, 15% of the amount of these distributions included in line 10.

A Medicare Advantage MSA is an Archer MSA designated as a Medicare Advantage MSA to be used solely to pay the qualified medical expenses of the account holder. To be eligible for a Medicare Advantage MSA, you must be enrolled in Medicare and have an HDHP that meets the Medicare guidelines. Contributions to the account can 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.

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

If the designated beneficiary is not the account holder's surviving spouse, or there is no designated beneficiary, the account ceases to be an MSA as of the date of death. The beneficiary completes Form 8853 as follows.

If the account holder's estate is the beneficiary, the value of the Medicare Advantage MSA as of the date of death is included in the account holder's final income tax return.

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.

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

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

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 -0- on line 15b. Otherwise, complete the worksheet below to figure the amount of the additional 50% tax to enter on line 15b.

The policyholder is the person who owns the proceeds of the LTC insurance contract, life insurance contract, or viatical settlement, and also can 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.

A qualified LTC insurance contract is a contract issued:

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

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.

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

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 below). 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.

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

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.

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, 2006, through May 31, 2006, and then at a rate of $195 per day from June 1, 2006, through December 31, 2006. 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 can 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, 2006, through December 31, 2006, and you have a second insurance contract that pays $1,500 per month from March 1, 2006, through December 31, 2006. 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, 2006. 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).

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

  

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

  

Step 3.   They allocate the aggregate per diem limitation of $36,800 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 $24,800 is allocated between Sam and Deborah.

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