1. (a) Medical savings account (MSA) — Defined — Arkansas Code § 26-51-436(5).

   1. (1)

      1. (A) An MSA is a trust or custodial account that is created or organized in the United States exclusively for the purpose of paying the qualified medical expenses of an account holder (i.e., taxpayer) as well as the taxpayer's spouse and/or dependents.
      2. (B) I.R.C. § 220(d)(1).
   2. (2) The Internal Revenue Service has an MSA pilot program for employees of small businesses and self-employed persons.
   3. (3) The accounts must be used in conjunction with high-deductible health insurance.
   4. (4) Participation is limited to the first seven hundred fifty thousand (750,000) taxpayers utilizing MSAs each year for the tax years 1997 through 2000.

2. (b) Medical savings account — Eligibility — Arkansas Code § 26-51-436(5).

   1. (1) In order to be eligible, a taxpayer must have insurance coverage only under a high-deductible health plan.
   2. (2) An "eligible individual" is more specifically defined at I.R.C. § 220(c)(1)(A).
   3. (3) "High-deductible health plan" is defined at I.R.C. § 220(c)(2)(A).

3. (c) Medical savings account (MSA) — Deductibility from income — Arkansas Code § 26-51-436(5).

   1. (1) The amount of MSA contributions made by a taxpayer should be broken down on a month-by-month basis.
   2. (2) For any given month, the limitation on the deduction that can be taken for that particular month is set forth at I.R.C. § 220(b)(1) and (2).

   3. (3) Other key points regarding deductibility of contributions include:

      1. (A) The annual contribution limit is the sum of the limits determined separately for each month, based on the individual's status and health plan coverage as of the first day of the month;
      2. (B)

4. (i) The deduction for MSA contributions cannot exceed the taxpayer's compensation.

   1. (ii) For employees, see I.R.C. § 220(b)(4)(A).

      1. (iii) For self-employed individuals, see I.R.C. § 220(b)(4)(B);
      2. (C) No deduction is allowed to an individual if any other person is entitled to a personal exemption on account of the individual, whether or not the personal exemption is actually taken;

      3. (D)

         1. (i) Contributions to an MSA for a tax year can be made until the due date for filing the individual's tax return for the year (determined without regard to extensions).
         2. (ii) For example, with respect to Arkansas individual income tax returns, the deadline for contributions that a taxpayer wishes to deduct on his or her 1997 return would be May 15, 1998; and

      4. (E)

         1. (i) MSA contributions are taken into account in arriving at AGI (i.e., they are taken above the line).
         2. (ii) As such, MSA contributions can be deducted even if the taxpayer does not itemize deductions.
         3. (d) Medical savings account (MSA) — Exclusion from income — Arkansas Code § 26-51-436(5).
   2. (1) Employer contributions to an MSA on behalf of an eligible individual are excludable from gross income.

   3. (2)

      1. (A) The amount excludable from gross income cannot exceed the MSA deduction limit applicable to the individual.
      2. (B) See subsection (c) of this section and I.R.C. § 106(a) and (b).
   4. (3) However, employer contributions to an MSA are not excludable from gross income if made at the election of the employee under a salary reduction arrangement under a cafeteria plan.

   5. (4) Other key points regarding excludability of contributions include:

      1. (A) Any employer contribution to an MSA (if otherwise allowable as a deduction) is allowed only for the tax year in which it is actually made; and
      2. (B) Every individual required to file an income tax return for the tax year must include on the return the aggregate amount contributed by employers to the MSAs of the individual or the individual's spouse for the tax year.

5. (e) Medical savings account (MSA) — Taxability of account earnings — Arkansas Code § 26-51-436(6).

   1. (1) MSA earnings are exempt from income taxation.

   2. (2)

      1. (A) However, if an MSA ceases to be an MSA, the account's subsequent earnings would be subject to taxation.
      2. (B) I.R.C. § 220(e).

6. (f) Medical savings account (MSA) — Taxability of account distributions — Arkansas Code § 26-51-436(7).

   1. (1)

      1. (A) Distributions from an MSA that are used to pay the qualified medical expenses of an individual or the individual's spouse or dependents are excludable from gross income.
      2. (B) I.R.C. § 220(f)(1).

   2. (2)

      1. (A) "Qualified medical expenses" are any expenses for medical care as defined under the rules relating to the itemized deduction for medical expenses.
      2. (B) See I.R.C. § 220(d)(2)(A).

Codification Notes: I.R.C. § 220(d)(1) is codified at 26 U.S.C. § 220(d)(1). I.R.C. § 220(c)(1)(A) is codified at 26 U.S.C. § 220(c)(1)(A). I.R.C. § 220(c)(2)(A) is codified at 26 U.S.C. § 220(c)(2)(A). I.R.C. § 220(b)(1) and (2) is codified at 26 U.S.C. § 220(b)(1) and (2). I.R.C. § 220(b)(4)(A) is codified at 26 U.S.C. § 220(b)(4)(A). I.R.C. § 220(b)(4)(B) is codified at 26 U.S.C. § 220(b)(4)(B). I.R.C. § 106(a) and (b) is codified at 26 U.S.C. § 106(a) and (b). I.R.C. § 220(e) is codified at 26 U.S.C. § 220(e). I.R.C. § 220(f)(1) is codified at 26 U.S.C. § 220(f)(1). I.R.C. § 220(d)(2)(A) is codified at 26 U.S.C. § 220(d)(2)(A).