OLR Research Report

October 23, 2003




By: Brandon T. Hooker, Research Fellow

You requested information on how the Internal Revenue Service (IRS) and Department of Revenue Services (DRS) treat medical savings accounts (MSA). You also wanted to know how an individual can obtain information on who offers MSAs.


An MSA is a tax-exempt trust or custodial account with a financial institution (like a bank or an insurance company) in which the account holder can save money for future medical expenses. IRS and DRS recognize two types of MSAs (Archer and Medicare plus Choice) for qualified account holders. If all account contributions and interest are used for future medical expenses, they are tax-free.

To open an MSA, a person must be self-employed or employed by a small company (50 or fewer employees). A self-employed person must contact a trustee (financial entity) the IRS has approved to make individual retirement arrangements. It is an individual’s responsibility to find a qualified entity. IRS does not compile a list of such entities. An employee of a small company can open an account on his own or through his employer.

The Archer and Medicare plus Choice programs are scheduled to end on December 31, 2003. An amendment to title XVIII (Medicare) of the Social Security Act, which is currently before the 108th Congress, calls for the removal of the end date and enrollee cap in the Medicare plus Choice program.


Types of MSAs

The MSA program establishes tax-exempt trusts that a person with a high deductible health plan (HDHP) can use to save for future health liabilities. There are two types of MSAs, Archer and Medicare plus Choice. People are eligible for these programs if they are self-employed or work for a company that employs 50 or fewer workers. An Archer MSA is a tax-exempt trust or custodial account that a person sets up with a U. S. financial company to pay for future medical expenses.

A Medicare plus Choice MSA is an Archer MSA designated by Medicare as the sole means of paying the qualified medical expenses of the policyholder. The Medicare plus Choice program differs from the Archer because Medicare, rather than the participant, deposits the money for medical bills. Under the Medicare plus Choice plan, an account holder can choose which HDHP policy he wants to use, but the policy must be pre-approved by the Medicare program.

Federal and State Tax Procedures

IRS states that “an individual must file forms 1040 and 8853 to accurately report any federal tax contributions, deductions, or distributions to their Archer or Medicare plus Choice MSA. ” According to DRS, any pertinent MSA tax information must comply with IRS requirements. Because this is a federal program, a Connecticut account holder does not have to report interest to DRS.

Benefits of MSA Program

The benefits an individual gets from the MSA program include the following:


People interested in the federal MSA program can contact IRS at (800) 829-1040 or download publication “969” at www. irs. gov. The publication addresses issues such as qualification criteria, program setup instructions, permitted insurance coverage, and employer participation rules. The Insurance Department (www. ct. gov/cid) provides a list of companies that offer the HDHP policies required for the MSA program. Information on HDHP policies that qualify for the Medicare plus Choice program is available from the Department of Social Services at (800) 841-1508.

BH: eh