Understanding MSAs To understand MSAs, you will want to know what an MSA is and whatthe benefits are of having one. You will also need to know whether youmeet the rules for starting an MSA. If you meet the rules, then youwill want to read the section titled Setting Up theAccount. What is an MSA?An MSA is a tax-exempt trust or custodial account with a financialinstitution (like a bank or an insurance company) where you can savemoney for future medical expenses. This account must be used inconjunction with a high deductible health plan. See HighDeductible Health Plan, later. What are the benefits of an MSA?You may enjoy several benefits from having an MSA. The interest or other earnings on the assets in your MSA aretax-free. You can claim or take a tax deduction even if you do notitemize your deductions on Form 1040. The contributions remain in your MSA from year to year untilthey are used. Rules for Starting an MSA You need to meet the following conditions before you can start anMSA. You must work for a small employer or beself-employed. You must have a high deductible health plan. Who is a Small Employer? A small employer is an employer who had an average of 50 or feweremployees during either of the last two calendar years. The definitionof small employer is modified for new employers and growing employers. New employer.A new employer is also considered a small employer for MSAs if heor she reasonably expects to employ 50 or fewer people this year. Growing employer.A small employer may begin high deductible health plans and MSAsfor his or her employees and then grow beyond 50 employees. Theemployer will continue to meet the requirement for small employers ifhe or she: Had 50 or fewer employees when the MSAs began, Made a contribution for the last year the employer had 50 orfewer employees, and Had an average of 200 or fewer employees each year after1996. High Deductible Health Plan To be eligible for an MSA, you must have a high deductible healthplan. If you are an employee, the plan must be through your smallemployer. You generally cannot have another health insurance plan. Definition.A high deductible health plan has: A higher annual deductible than typical health plans,and A maximum limit on the annual out-of-pocket medical expensesthat you must pay for covered expenses. Limits.The following table shows the limits for annual deductible amountsand the maximum out-of-pocket expenses for high deductible healthplans. Type of coverage Minimumannualdeductible Maximumannualdeductible Maximumannualout-of-pocketexpenses Self-only $1,500 $2,250 $3,000 Family $3,000 $4,500 $5,500 Family plans that do not currently meet the high deductiblerules.There are some family plans that have deductibles for individualfamily members. These deductibles are less than the annual deductiblefor the family plan. Under these plans, if you meet the individualdeductible for one family member, you do not have to meet the annualdeductible amount for the family plan. These plans do not qualify as ahigh deductible health plan. Example.Mr. Wilber has health insurance with company A. The annualdeductible amount for the family plan is $3,000. This plan also hasindividual deductible amounts of $1,500 for each family member. Mr.Wilber's wife had $1,700 of covered medical expenses this year. Theyhad no other medical expenses for the year. The plan paid $200 to Mr.Wilber because Mrs. Wilber met the individual deductible amount of$1,500, even though the Wilbers did not meet the $3,000 annualdeductible for the family plan. The plan does not qualify as a highdeductible health plan. TaxTip: Insurance companies that have family plans with individualdeductibles may change these health plans to meet the high deductiblerules. Check with your insurance company if you have such a plan tosee if they are going to change the plan to meet the rules. Other health insurance.You (or your spouse if you file jointly) generally cannot have anyother health plan that is not a high deductible health plan. However,this rule does not apply if the other health plan(s) only cover thefollowing items. Accidents. Disability. Dental care. Vision care. Long-term care. Benefits provided by insurance: Related to workers' compensation laws, tort liabilities, orownership or use of property, For a specific disease or illness, or That pays a fixed amount per day (or other period) ofhospitalization. Setting Up the Account When you set up an MSA, you will need to work with a trustee andknow the rules for contributing and withdrawing money from theaccount. MSA trustee.The person or business you set up your MSA with is called atrustee. A trustee can be a bank, insurance company, oranyone already approved by the IRS to be a trustee of individualretirement arrangements. Your employer may already have someinformation on MSA trustees in your area. Who can contribute to my MSA?Your employer may decide to make contributions to an MSA for you.You do not pay taxes on these contributions. If your employer does notmake contributions to your MSA, you can make your own contributions toyour MSA and deduct these amounts on your tax return without itemizingdeductions. Both you and your employer cannot make contributions toyour MSA in the same year. There are limits to the amounts that can becontributed to your MSA. See Making Contributions, later.You do not have to make contributions to your MSA every year. Caution: If your spouse is covered by your high deductible health plan andreceives contributions to an MSA from an employer, you cannot makecontributions to your MSA that year. Bruges luxury hotelsHow can I make withdrawals from my MSA?France HotelesYou can make tax-free withdrawals from your MSA to pay forqualified medical expenses (discussed later). If you make withdrawalsfor other reasons, the amount you withdraw will be subject to incometax and may be subject to an additional excise tax as well. SeeReceiving Distributions, later. You do not have to makewithdrawals from your MSA each year. Changing employers.If you change employers and still meet the rules for having an MSA,you can continue to use that MSA. However, you may not make additionalcontributions unless you are otherwise eligible.