Order Code RS21573
July 21, 2003
CRS Report for Congress
Received through the CRS Web
Tax-Advantaged Accounts for Health Care
Expenses: Side-by-Side Comparison
Bob Lyke
Specialist in Social Legislation
Chris L. Peterson
Analyst in Social Legislation
Domestic Social Policy Division
Summary
The House-passed Medicare prescription drug bill, H.R. 1, includes two new tax-
advantaged accounts for health care expenses, health savings accounts (HSAs) and
health savings security accounts (HSSAs). The Medicare prescription drug bill that
passed the Senate, S. 1, does not have comparable provisions. Whether the accounts
will be included in the final bill is to be considered by the conference committee.
The accounts in the House bill are widely referred to as “medical savings accounts”
since they provide tax advantages to encourage people to save for future medical
expenses. However, both accounts can be distinguished from Archer medical savings
accounts (MSAs) authorized under current law, as they can from health care flexible
spending accounts (FSAs) and health reimbursement accounts (HRAs) that some
employers now offer. While the five accounts have some features and objectives in
common, they differ in important respects. Keeping the accounts straight can be
difficult, especially when they are discussed informally using alternative names.
This report provides brief summaries and background information about the five
accounts and then compares them with respect to characteristics such as eligibility,
contribution limits, and use of funds. The report will be updated to reflect legislative
developments and may be expanded to include additional topics and perspectives.
Brief Summaries and Background
Three of the accounts discussed in this report are permitted under current law.
Health care flexible spending accounts (FSAs) are employer-established arrangements
that reimburse employees for medical and dental expenses not covered by insurance.
They usually are funded through salary reduction agreements under which employees
receive less pay (for example, $100 a month) in exchange for equivalent contributions to
their accounts (in this case, $1,200 for the year). The entire annual amount must be made
available to employees at the beginning of the year. Employees choose how much to put
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into their accounts, which can vary from year to year; however, they must forfeit unused
balances at the end of the year. Contributions are not subject to either income or
employment taxes (for example, Social Security and Medicare taxes), unlike the pay
employees otherwise would have received.
FSAs funded by salary reductions are governed by Section 125 of the Internal
Revenue Code, which allows contributions to be exempt from taxes despite the fact that
employees have the choice to receive taxable wages.1 However, most rules regarding
FSAs are not spelled out in the Code; rather, they were included in proposed regulations
that the Internal Revenue Service (IRS) issued in 1984 and 1989. Final rules regarding
permissible mid-year election changes were issued in 2000 and 2001. FSAs are available
to more than one-fifth of private-sector workers and nearly half of government workers
(including federal employees), though participation rates are substantially lower.2
Health reimbursement accounts (HRAs) are also employer-established
arrangements to reimburse employees for medical and dental expenses not covered by
insurance. As is the case with FSAs, contributions are not subject to either income or
employment taxes. In contrast, however, contributions cannot be made through salary
reduction agreements; only employers may contribute. Also unlike FSAs,
reimbursements can be limited to amounts previously contributed. Unused balances may
be carried over indefinitely, though employers may limit the aggregate carryovers.
HRAs are governed by Section 105 of the Internal Revenue Code, which allows
health plan benefits used for medical care to be exempt from taxes, and Section 106 of
the Code, which allows employer contributions to those plans to be tax-exempt. Rules
regarding HRAs are spelled out in IRS revenue rulings and notices issued in 2002.3 Since
HRAs are relatively new, few people have these accounts.
Archer medical savings accounts (MSAs) are personal savings accounts for
unreimbursed medical expenses. MSAs can be established and contributions made only
when the account owners have high deductible insurance and no other coverage, with
some exceptions. (For the deductible amounts required for MSAs and the other accounts
in this report, see the side-by-side comparison that follows.) In addition, the account
owners must be either self-employed or employees covered by a high deductible plan
established by their small employer (50 or fewer employees, on average). Contributions
made by employers are exempt from income and employment taxes, while contributions
by the account owners (allowed only if the employer does not contribute) are deductible.
Contributions are limited to a percentage of the health insurance deductible. MSA
earnings are tax-exempt, as are withdrawals for medical expenses. Nonqualified
distributions (i.e., those not used for health care) are taxable and generally subject to an
additional 15% penalty. Unused balances may be carried over from year to year.
1 Section 125 thus provides an express exception to the constructive receipt rule, which requires
taxation of what is normally nontaxable income when taxpayers have the choice of receiving
taxable income or nontaxable income.
2 FSA rules are available at 49 Federal Register 19321 and 50733, 54 FR 9460, 65 FR 15548 and
66 FR 1837. For data on the use of FSAs, see CRS Report 96-500, Flexible Spending Accounts
and Medical Savings Accounts: A Comparison, by Bob Lyke and Chris L. Peterson.
3 Revenue Ruling 2002-41 and Notice 2002-45.

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MSAs are governed by Section 220 of the Internal Revenue Code, which allows
exceptions to what would otherwise be considered taxable employment income and
personal savings. They were first authorized by the Health Insurance Portability and
Accountability Act of 1996 (P.L. 104-191). That legislation also limited the number of
accounts, though by mid-2002 only about 100,000 had been established, far below the
ceiling of 750,000. Later amendments extended the deadline for establishing new
accounts to December 31, 2003.
The health savings accounts (HSAs) included in the House-passed Medicare
prescription drug bill (H.R. 1) might be considered an expanded replacement for current
MSAs. Like those accounts, HSAs could be established and contributions made only
when the account owners have high deductible insurance and no other coverage, with
some exceptions. However, the legislation would allow deductibles lower than those
under MSAs and would permit contributions up to the full deductible amount. Eligibility
would no longer be restricted to people who are self-employed or work for small
employers, and contributions could be made both by employers and account owners.
Similar rules would apply to withdrawals for medical expenses and nonqualified
distributions.

The health savings security accounts (HSSAs) included in H.R. 1 could be more
widespread than HSAs.4 HSSAs could be established and contributions made by account
owners who are uninsured or who have a minimum deductible health plan. They could
make a tax-deductible contribution of up to $2,000 each year if they have self-only
coverage or are uninsured with no dependents, and up to $4,000 each year if they have
family coverage or are uninsured with dependents and file a joint return. Larger
contributions could be made by owners age 55 and over. Contributions would be reduced
and then eliminated for higher income owners. Rules similar to MSAs would apply to
withdrawals for medical expenses and nonqualified distributions.
Both HSAs and HSSAs were included in H.R. 2596, which was introduced on June
25, 2003, and passed by the House the next day. Immediately after passage, its provisions
were appended to H.R. 1, the House-passed Medicare prescription drug bill, as provided
in H. Res. 299. The Senate-passed Medicare prescription drug bill, S.1, does not include
accounts comparable to HSAs and HSSAs.
Side-by-Side Comparison
The side-by side comparison on the following pages shows the principal features of
FSAs, HRAs, and MSAs and the proposed HSAs and HSSAs. Rules are expressed in
general terms, and not all details are shown. For additional information, readers might
refer to the legislative language and IRS guidance.
4 The estimated revenue loss for HSSAs is $163.4 billion for fiscal years 2004 through 2013,
while the estimated revenue loss estimated for HSAs for the same period is $5.7 billion. Joint
Committee on Taxation, JCX-65-03, June 26, 2003.

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Summary of General Features of FSAs, HRAs and MSAs, and Proposed HSAs and HSSAs, 2003
Health care flexible
Health
Medical savings accounts
Health savings
spending accounts (FSAs)
reimbursement accounts
(Archer MSAs)
Health savings accounts
security accounts (HSSAs)
(HRAs)
(HSAs)
Eligibility
Employees whose employers
Employees whose employers
Individuals with qualifying
Individuals with qualifying
Individuals with qualifying
offer this benefit. Former
offer this benefit. Former
health insurance who are either
health insurance. Ineligible
health insurance or with no
employees may be included.
employees may be included.
employees of a small employer
i n d i v i d u a l s m a y k e e p
health insurance, provided
(50 or fewer workers) or self-
p r e v i o u s l y e s t a b l i s h e d
their adjusted gross income is
Employers not restricted by
Employers not restricted by
e m p l o y e d . I n e l i g i b l e
accounts but cannot make
less than thresholds specified
size.
size.
i n d i v i d u a l s ma y k e e p
contributions.
below. Ineligible individuals
p r e v i o u s l y e s t a b l i s h e d
m a y k e e p p r e v i o u s l y
accounts but cannot make
established accounts but cannot
contributions.
make contributions.
Definition of
N o h e a l t h i n s u r a n c e
N o h e a l t h i n s u r a n c e
Self-only deductible must be
Self-only deductible must be
Self-only deductible must be
qualifying
requirements.
requirements, although HRAs
between $1,700 and $2,500,
between $1,000 and $2,500
at l e ast $500; family
health
are usually combined with high
wi t h a n o u t - o f - p o c k e t
wi t h a n o u t - o f - p o c k e t
deductible must be at least
insurance
deductible health insurance.a
maximum of not more than
maximum of not more than
$1,000.a (2004 amounts)
$3,350; family deductible
$3,350; family deductible
must be between $3,350 and
must be between $2,000 and
No out-of-pocket maximum
$5,050, with an out-of-pocket
$5,050 with an out-of-pocket
requirement.
maximum of not more than
maximum of not more than
$6,150. (2003 amounts)
$6,150.a (2004 amounts
calculated by Joint Committee
on Taxation)
Contributions
By employer, employee, or
Only by employer.
B y
empl o ye r o r account
By employer, the account
By employer, account owner
both. Usually funded by
owner, but not both.
owner, or both.
and/or a member of the
employee through salary
account owner’s family.
reduction agreement.

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Health care flexible
Health
Medical savings accounts
Health savings
spending accounts (FSAs)
reimbursement accounts
(Archer MSAs)
Health savings accounts
security accounts (HSSAs)
(HRAs)
(HSAs)
Annual
No ne req uired , tho ugh
None required. Employers
65% of deductible for self-only
100% of the deductible.
$ 2 , 0 0 0 a n n u a l l y f o r
contribution
employers usually impose a
usually set their contributions
plan, 75% for family policy.
individuals who have self-only
limits
limit.
below the annual deductible of
coverage or who are uninsured
the accompanying health
and without dependents,
insurance.
provided their adjusted gross
income does not exceed
$75,000 ($150,000 for joint
returns); $4,000 annually for
individuals with family
coverage or who are uninsured
and have dependents or file a
joint return, provided their
adjusted gross income does not
exceed $150,000. Additional
contributions allowed for
those age 55 and over.b
Qualifying
Most unreimbursed medical
Most unreimbursed medical
Most unreimbursed medical
Most unreimbursed medical
Most unreimbursed medical
expenses
expenses, though employers
expenses, though employers
expenses. May be used for
expenses. May be used for
expenses. May be used for
may imp o se ad d itio nal
may imp o se ad d itio nal
premiums for long-term care
premiums for long-term care
premiums for long-term care
limitations. May not be used
limitations. May be used for
insurance, COBRA, and health
insurance, COBRA, and health
insurance, COBRA, health
for long-term care or health
long-term care and health
insurance for those receiving
insurance for those receiving
insurance for those receiving
insurance premiums.c
insurance premiums, if the
unemployment compensation
unemployment compensation
unemployment compensation
employer allows.
under federal or state law.
under federal or state law.
under federal or state law,
health insurance for those 65
and older, and qualifying
health insurance toward which
neither the account owner’s
s p o u s e n o r e m p l o y e r
contributes.
Allowable non-
None
None
Permitted, subject to income
Permitted, subject to income
Permitted, subject to income
medical
tax and 15% penalty except in
tax and 15% penalty except in
tax and 15% penalty except in
withdrawals
cases of disability, death, or
cases of disability, death, or
cases of disability, death, or
attaining age 65.
attaining age 65.
attaining age 65.

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Health care flexible
Health
Medical savings accounts
Health savings
spending accounts (FSAs)
reimbursement accounts
(Archer MSAs)
Health savings accounts
security accounts (HSSAs)
(HRAs)
(HSAs)
Carryover of
None allowed. Balances
Permitted, although some
Full amount may be carried
Full amount may be carried
Full amount may be carried
unused funds
remaining at year’s end are
employers limit amount that
over indefinitely.
over indefinitely.
over indefinitely.
forfeited to employer.
can be carried over.
Portability
Balances generally forfeited at
At discretion of employer,
Yes
Yes
Yes
termination, although COBRA
though subject to COBRA
extensions sometimes apply.
provisions.
FSA and MSA
Up to $500 of unused balances
(Not applicable)
MSA funds may be transferred
(Not applicable)
(Not applicable)
changes
may be carried over or
to an HSA or an HSSA
proposed in
transferred to a qualified
(subject to plan limits).
H.R. 1
retirement plan, deferred
compensation plan, an HSA, or
an HSSA (subject to plan
limits).
a A plan may pay for preventive benefits without requiring the enrollee to pay the deductible and still be considered a high deductible plan.
b Individuals 55 and over may contribute additional sums, limited to $500 more in 2004, $600 more in 2005, $700 more in 2006, $800 more in 2007, $900 more in 2008, and $1,000 more
in 2009 and thereafter. For individuals who have self-only coverage or who are uninsured and without dependents, the $2,000 limit and allowable additional sums are proportionally
reduced to $0 as their adjusted gross income increases from $75,000 to $85,000 ($150,000 to $170,000 for joint returns). For individuals who have family coverage or who are uninsured
and have dependents or file a joint return, the $4,000 limit and allowable additional sums are proportionally reduced to $0 as their adjusted gross income increases from $150,000 to
$170,000. Aggregate contribution limits are also reduced by amounts contributed to an MSA, HSA, or the HSSA of another person. Contributions of $200 may be made as aggregate
contribution limits are calculated to be greater than $0 but less than $200.
c Although FSAs may not be used to pay health insurance premiums, employees eligible for FSAs are also usually eligible for premium conversion plans which allow their contributions for
employer-sponsored health insurance to be paid on a pre-tax basis.

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