HSAs, FSAs and Other Tax-Favored Accounts

Various programs are designed to give individuals tax advantages to offset health care costs. This section explains the following programs.

Special Updates: Same-sex couples, legally married in jurisdictions that recognize their marriages, will be treated as married for all federal tax purposes (including employee benefits). More specific IRS guidance includes:   

  • A set of Q&As, effective December 16, 2013, regarding the participation by same-sex spouses in cafeteria plans, HSAs, and health FSAs; and
  • Notice 2013-61 establishing special procedures for correcting overpayments with respect to employee benefits provided to same-sex spouses (including employer-provided health coverage).

For more information, please click here.

HSA—Health Savings Account

A Health Savings Account is an alternative to a typical health insurance plan; it is a savings product that offers a different way for consumers to pay for their health care. HSAs enable an employee to pay for current health expenses and save for future qualified medical and retiree health expenses on a tax-free basis.  An individual must be covered by a High Deductible Health Plan (HDHP) to be able to take advantage of HSAs.

Used in conjunction with a high deductible health plan (HDHP), an HSA may receive contributions from an eligible individual or any other person, including an employer or a family member, on behalf of an eligible individual. Contributions, other than employer contributions, are deductible on the eligible individual's return whether or not the individual itemizes deductions. Employer contributions are not included in income. Distributions from an HSA that are used to pay qualified medical expenses are not taxed.

Special Update: An IRS memorandum clarifies how HSA eligibility is affected by the rules related to carrying over certain unused amounts in a health flexible spending arrangement (FSA). Click here for more information.

FSA—Flexible Spending Account

A health flexible spending arrangement (FSA) allows employees to be reimbursed for medical expenses. FSAs are usually funded through voluntary salary reduction agreements with the employer. No employment or federal income taxes are deducted from the employee contribution. The employer may also contribute. Reimbursements from an FSA that are used to pay qualified medical expenses are not taxed.

Note: Employers may now allow employees to carryover up to $500 of unused amounts in a health FSA to use in the following plan year, which does not count against or otherwise affect the $2,550 salary reduction limit. A plan adopting this carryover provision is not permitted to also provide a grace period in the plan year to which unused amounts may be carried over. Note that for tax year 2015, the annual dollar limit on employee contributions to employer-sponsored health FSAs increases to $2,550. Further details for amending the plan document to adopt this carryover provision are described in the agency guidance.

HRA—Health Reimbursement Account

A health reimbursement arrangement (HRA) must be funded solely by an employer. The contribution cannot be paid through a voluntary salary reduction agreement on the part of an employee. Employees are reimbursed tax free for qualified medical expenses up to a maximum dollar amount for a coverage period. An HRA may be offered with other health plans, including FSAs. Reimbursements from an HRA that are used to pay qualified medical expenses are not taxed.

Archer MSA

An Archer MSA is a tax-exempt trust or custodial account that you set up with a U.S. financial institution (such as a bank or an insurance company) in which you can save money exclusively for future medical expenses.

An Archer MSA may receive contributions from an eligible individual and his or her employer, but not both in the same year. Contributions by the individual are deductible whether or not the individual itemizes deductions. Employer contributions are not included in income. Distributions from an Archer MSA that are used to pay qualified medical expenses are not taxed.

A Medicare Advantage MSA is an Archer MSA designated by Medicare to be used solely to pay the qualified medical expenses of the account holder who is enrolled in Medicare. Contributions can only be made by Medicare. The contributions are not included in your income. Distributions from a Medicare Advantage MSA that are used to pay qualified medical expenses are not taxed.

*According to IRS guidance, a health plan will not fail to qualify as a HDHP merely because it provides certain preventive health services without a deductible, as required under Health Care Reform. Click here for more information.

Additional Information