Tax Problems Surface with MSAs

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Tax problems surface with medical savings accounts

by Tony Novak, CPA, MBA, MT
, revised 11/30/2011

A new tax problem has surfaced for self-employed individuals who take a deduction for a medical savings account. It turns out that many of these individuals are not covered by qualifying medical insurance. Surprisingly, many of those denied seem to be tax advisers who were generally aware of the tax code but unaware of the regulatory and tax-reporting aspects of health insurance plans. Increasingly the IRS relies on “electronic matching” of transactions to red flag unauthorized tax deductions.

“I read the tax code and thought my (health insurance) plan qualified,” commented one CPA
caught in this dilemma. But the IRS caught the mistake when the accountant’s social security number was not reported by MSA-qualified insurance plans as one qualified to take the tax deduction. The deduction was denied and additional taxes assessed.

The problem stems from the fact that the tax code does not clearly specify that a qualifying health insurance plan must be one that participates in the MSA test program and reports to the IRS the roster of enrolled participants. Taxpayers might be led to believe that any high-deductible health insurance plan that meets the stated requirements would qualify the taxpayer for a deduction of MSA account deposits. “My accountant told me to do it this way,” complained one freelance writer in North Carolina, where the qualifying insurance is not available to self-employed individuals. She seemed to be indignant upon receiving the news that she was not eligible for the tax deduction.

Freedom Benefits warns customers that qualifying medical insurance will state plainly in the name of the plan and the title page of the insurance policy that it is a “Medical Savings Account” qualified health insurance plan.

Status: outdated but historically accurate

See more recent articles on Health Savings Accounts


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