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Status: outdated but historically accurate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

tonynovak.comThis Web site is independently owned and operated by Tony Novak operating under the trademarks “Freedom Benefits”, “OnlineAdviser” and “OnlineNavigator”. Opinions expressed are the sole responsibility of the author and do not represent the opinion of any other person, company or entity mentioned. Tony Novak is not a representative, agent, broker, producer or navigator for any securities broker dealer firm, federal or state health insurance marketplace or qualified health plan carrier and has no financial position in any stocks mentioned. Novak may act as and be compensated as an accountant, agent, adviser, writer, consultant, marketer, reviewer, endorser, producer, lead generator or referrer to the companies listed on this site or other commercial companies and non-governmental insurance exchanges. Information is from sources believed to be reliable but cannot be guaranteed. Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues or a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.

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