Question

Justin age 66 paid $6000 in qualified medical expenses in 2020 and took an $8000 Archer MSA distribution during the year. What tax penalty will apply with respect to the excess distribution?

Answer 1

Answer:

MSA contributions not used for qualified medical expenses are subject to tax like HSA. Archer MSA distributions are subjected to additional 20% Tax on the taxable portion of your distributions unless one of the following exception applies,if account holder  dies, aged above 65 years or becomes disabled.

Here, if Justin is aged below 65 years he is taxable for Archer MSA distributions over qualified medical expenses and he is liable to pay additional tax (Penalty) at 20% on taxable portion of distributions.

Justin out of his $8000 Archer MSA distribution payment towards qualified expenses of $6000, is not taxable and liable to pay tax and additional tax (penalty) on $2000(8000-6000).

As Justin aged above 65 years, He is not liable to pay additional tax(penalty) on $2000 but this excess distribution is taxable.

Answer 2

Based on Justin's age and the Archer distribution amount, the tax penalty that will apply to the excess distribution is $0.

When a person has such an excess Archer MSA distribution, they will have not have to pay taxes on this if they are above 65 years or become disabled after claiming it.

Justin was 66 when he claimed this excess distribution of:

= 8,000 - 6,000

= $2,000

He will therefore not have any tax penalties applicable to him.

In conclusion, there are no tax penalties for Justin.

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