After a decade of considering various proposals for creating a medical savings account in the 1980s, Congress authorized the Archer Medical Savings Account test project in 1996. The idea was to let individuals set up tax-advantaged savings accounts that could be used to pay medical expenses. The project called for up to 750,000 self-employed taxpayers to set up the accounts. Unfortunately (and predictably), the rules for the accounts were very restrictive and not many people opted to set up an account. The Archer accounts were made obsolete in 2003 when Congress passed the Medicare Part D
The Archer accounts were made obsolete in 2003 when Congress passed the Medicare Part D benefit and authorized the creation of a Health Savings Account (HSA) for individuals in qualified medical plans. HSAs offer some pretty great advantages if you are eligible to create one: (1) contributions to the account are tax-deductible; (2) The account can gain interest (or if set up as an investment account, can accrue gains) without being subject to tax; and (3) amounts can be withdrawn tax-free if used for qualified medical expenses, including long-term care insurance premiums. (As with all things created by Congress, there are statutes and IRS regulations that set limits to the deductibility of contributions, etc. Those limits and exceptions are outside the scope of this post, but you can learn more about HSAs at www.treasury.gov ) Although individuals enrolled in Medicare cannot contribute to a previously setup HSA, they can make withdrawals from the HSA while on Medicare. You can learn about the interplay between HSAs and Medicare by reading this post at aarp.org.