Order Code RS21573
Updated November 25, 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 conference agreement on the Medicare prescription drug bill (H.R. 1) includes
new tax-advantaged accounts for health care expenses called health savings accounts
(HSAs). These accounts had been included in the original House-passed bill, but they
were not in the Senate amendment. Other tax-advantaged accounts in the original
House-passed bill, health savings security accounts (HSSAs), were not included in the
conference agreement.
The new accounts in conference agreement might be considered an expanded form
of Archer medical savings accounts (MSAs) that are authorized under current law. Both
HSAs and MSAs ought to be distinguished from two other health care accounts
authorized also under current law, health care flexible spending accounts (FSAs) and
health reimbursement accounts (HRAs). While the four 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 four
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 or
otherwise reimbursable. 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
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annual amount must be made available to employees at the beginning of the year.
Employees choose how much to put 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 (i.e., 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 or otherwise reimbursable. 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
medical expenses not covered by insurance or otherwise reimbursable. 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
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.
Also see IRS revenue ruling 2003-102. 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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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.
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 conference agreement on the
Medicare prescription drug bill (H.R. 1) might be considered expanded versions of current
MSAs. (The conference agreement passed the House on November 22 and the Senate on
November 25.) Like those accounts, HSAs could be established and contributions made
only when account owners have high deductible insurance and no other coverage, with
some exceptions. However, the legislation would allow deductibles lower than those
required for MSAs, and it would permit larger contributions. Additional contributions
could be made by individuals who are at least 55 years of age but not yet eligible for
Medicare. 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, with some exceptions. There would be no statutory cap on the
number of HSA accounts.
HSAs were included in H.R. 1 as passed by the House in June, 2003; they were not
in the Senate amendment. The House bill also included health savings security accounts
(HSSAs), which would have allowed even more individuals and families to save for
health care expenses on a tax-preferred basis. The Senate bill did not have HSSA
provisions, and they were omitted from the conference agreement.4
H.R. 1 also would have allowed up to $500 in FSA balances unused at the end of the
year to be carried over or transferred to a qualified retirement plan, a deferred
compensation plan, an HSA, or an HSSA. This provision was not included in the
conference agreement.
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. Rules are expressed in general terms,
and not all details are shown. For additional information, readers might refer to IRS
guidance and the legislative language of H.R. 1.
4 HSSAa are described in earlier versions of this report, available from the authors.

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Summary of General Features of FSAs, HRAs and MSAs, and Proposed HSAs and HSSAs, 2003
Health care flexible spending
Health reimbursement accounts
Medical savings accounts
Health savings accounts (HSAs) in
accounts (FSAs)
(HRAs)
(Archer MSAs)
H.R. 1 conference agreement
Eligibility
Employees whose employers offer this
Employees whose employers offer this
Individuals with qualifying health
Individuals with qualifying health
benefit.
Former employees may be
benefit.
Former employees may be
insurance who are either employees of
insurance. Ineligible individuals may
included.
included.
a small employer (50 or fewer
keep previously established accounts
workers) with a high deductible plan
but cannot make contributions.
Employers not restricted by size.
Employers not restricted by size.
or
self-employed.
Ineligible
individuals
may
keep
previously
established accounts but cannot make
contributions.
Definition of
No health insurance requirements.
No health insurance requirements,
Self-only deductible must be at least
Self-only deductible must be at least
qualifying health
although HRAs are usually combined
$1,700 and not more than $2,600, with
$1,000; the family deductible must be
insurance
with high deductible health insurance.
an
out-of-pocket
maximum
for
at least $2,000. The required out-of-
covered benefits of not more than
pocket expenses for covered benefits
$3,450; family deductible must be at
cannot exceed $5,000 for self-only
least $3,450 and not more than $5,150,
coverage and $10,000 for family
with an out-of-pocket maximum of not
coverage.
more than $6,300 (2004 amounts).
Contributions
By employer, employee, or both.
Only by employer.
By employer or account owner, but
By employer, the account owner, or
Usually funded by employee through
not both.
both.
salary reduction agreement.
Annual contribution
None required, though employers
None required. Employers usually set
65% of the deductible for self-only
The lesser of 100% of the deductible
limits
usually impose a limit.
their contributions below the annual
coverage and 75% of the deductible
or $2,600 for self-only coverage and
deductible of the accompanying health
for family coverage.
100% of the deductible or $5,150 for
insurance.
family coverage (2004 amounts).
Individuals who are at least 55 years of
age but not yet eligible for Medicare
can contribute an additional $500 in
2004, increasing to $1,000 more in
2009 and thereafter.

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Health care flexible spending
Health reimbursement accounts
Medical savings accounts
Health savings accounts (HSAs) in
accounts (FSAs)
(HRAs)
(Archer MSAs)
H.R. 1 conference agreement
Qualifying expenses
Most unreimbursed medical expenses,
Most unreimbursed medical expenses,
Most unreimbursed medical expenses.
Most unreimbursed medical expenses.
though
employers
may
impose
though
employers
may
impose
May be used for premiums for long-
May be used for premiums for long-
additional limitations. May not be used
additional limitations. May be used
term care insurance, COBRA, and
term care insurance, COBRA, health
for long-term care or health insurance
for
long-term
care
and
health
health insurance for those receiving
insurance
for
those
receiving
premiums.
insurance premiums, if the employer
unemployment compensation under
unemployment compensation under
allows.
federal or state law.
federal or state law, and health
insurance
(other
than
Medigap
policies) for individuals who are 65
years of age and older.
Allowable non-
None
None
Permitted, subject to income tax and
Permitted, subject to income tax and
medical
15% penalty except in cases of
10% penalty except in cases of
withdrawals
disability, death, or attaining age 65.
disability, death, or attaining age 65.
Carryover of unused
None allowed. Balances remaining at
Permitted, although some employers
Full amount may
be carried over
Full amount may be carried over
funds
year’s end are forfeited to employer.
limit amount that can be carried over.
indefinitely.
indefinitely.
Portability
Balances
generally
forfeited
at
At discretion of employer, though
Portable.
Portable.
termination,
although
COBRA
subject to COBRA provisions.
extensions sometimes apply.

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