Order Code RS21573
Updated March 21, 2007
Tax-Advantaged Accounts for Health Care
Expenses: Side-by-Side Comparison
Bob Lyke and Chris L. Peterson
Domestic Social Policy Division
Summary
Health Savings Accounts (HSA) are the newest addition to an array of tax-
advantaged accounts that people can use to pay for unreimbursed medical expenses,
such as deductibles, copayments, and services not covered by insurance. First available
January 1, 2004, HSAs have largely replaced the similar but more restrictive Archer
Medical Savings Accounts (MSAs), which never attracted many participants. In
addition, people may have access to two employment-based accounts, Health
Reimbursement Accounts (HRAs) and health care Flexible Spending Accounts (FSAs).
Collectively, these accounts have some features and objectives in common, but they also
differ in important respects. Keeping these accounts straight can be difficult, especially
when they are discussed informally using different names.

This report provides brief summaries and background information about the four
accounts and then compares them with respect to eligibility, contribution limits, use of
funds, and other characteristics for tax year 2007. The report concludes with a brief
discussion of equity and several other issues. It will be updated when changes occur.
Brief Summaries and Background
Four types of tax-advantaged accounts are permitted under current law for people to
pay unreimbursed medical expenses such as deductibles, copayments, and services not
covered by insurance: health care Flexible Spending Accounts, Health Reimbursement
Accounts, Health Savings Accounts, and Archer Medical Savings Accounts.1
Health care Flexible Spending Accounts (FSA) 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 (e.g., $100 less a month) in exchange
1 For additional general information, see Internal Revenue Service publication 969, Health
Savings Accounts and Other Tax-Favored Health Plans
, available at [http://www.irs.gov].

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for equivalent contributions to their accounts (in this case, $1,200 for the year).
Employees choose how much to put into their accounts, which can vary from year to year.
They forfeit unused balances at the end of the year unless the employer offers a grace
period for additional claims of up to 2½ months after the end of the year (e.g., so medical
expenses incurred by March 15, 2008, could be reimbursed from the FSA for 2007). A
limited, one-time rollover may be made to a Health Savings Account. The entire annual
amount of an FSA must be made available to employees at the beginning of the year.
Contributions are not subject to 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 exempts contributions from taxes despite the fact that employees
have the choice to receive taxable wages.2 Most rules regarding FSAs are not spelled out
in the Code; 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 (typically in larger establishments) and nearly half of government
workers (including federal employees), though participation rates are substantially lower.3
Health Reimbursement Accounts (HRA) 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. However, contributions cannot be made
through salary reduction agreements; only employers may contribute. Employers need
not actually fund HRAs until employees draw upon them. 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. A
limited, one-time rollover may be made to a Health Savings Account.
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 2002.4
Health Savings Accounts (HSA) are tax-exempt accounts for paying medical and
dental expenses not covered by insurance or otherwise reimbursable. They can be
established and contributions made only when the owner has qualifying high deductible
insurance (a deductible of at least $1,100 for self-only coverage and $2,200 for family
coverage, plus other criteria) and no other coverage including Medicare, with some
exceptions. Contributions are limited to $2,850 for self-only coverage and $5,650 for
family coverage. An additional contribution of $800 is allowed people age 55 and older.
2 Section 125 governs cafeteria plans; it 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.
3 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 RL32656, Health Care Flexible Spending Accounts, by Chris L. Peterson and Bob Lyke.
4 IRS Revenue Ruling 2002-41 and Notice 2002-45.

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(The dollar amounts in the last several sentences are for 2007.) HSAs carry tax
advantages that can be significant for some people. Contributions made by employers are
exempt from income and employment taxes; account owners may deduct contributions
they make. Withdrawals for medical expenses are not taxed; those used for other
purposes are taxable and subject to an additional 10% penalty except in cases of disability,
death, or attaining age 65. Unused balances may be carried over from year to year without
limit. As of January, 2006, nearly 3.2 million people were covered by HSA-high
deductible health plans. The number includes policy-holders as well as their family
members.5
HSAs were first authorized by the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (MMA, P.L. 108-173). Most statutory rules are in Section
223 of the Internal Revenue Code, though there are important IRS revenue rulings and
notices as well.6
Archer Medical Savings Accounts (MSA) might be viewed as a restricted
precursor to HSAs. Like them, MSAs can be established and contributions made only
when account owners have qualifying high deductible insurance and no other coverage,
with some exceptions. Contributions made by employers are exempt from income and
employment taxes, while contributions made by account owners (allowed only if the
employer does not contribute) are deductible. Withdrawals are not taxed if used for
medical expenses; those used for other purposes are taxable and subject to an additional
15% penalty with some exceptions. Unused balances may be carried over from year to
year without limit. The principal difference is that eligibility is limited to people who are
self-employed or who are employees covered by a high deductible plan established by
their small employer (50 or fewer employees, on average). In addition, the minimum
deductible levels are higher and the contribution limits are lower. For details, see the
comparison table that follows.
MSAs were first authorized by the Health Insurance Portability and Accountability
Act of 1996 (P.L. 104-191). That legislation also set a deadline for establishing new
accounts and generally limited the total number to 750,000 (not counting accounts of
owners who were previously uninsured, among others), though for tax year 2003 the IRS
estimated there were fewer than 80,000 accounts in total. Later amendments extended the
deadline for new accounts to December 31, 2007. However, most MSA owners can now
have HSAs, and their MSA balances can be rolled over into the new accounts. Most
statutory rules governing MSAs are in Section 220 of the Internal Revenue Code.
5 The number is based on a survey by America’s Health Insurance Plans. See CRS Report
RS22417, Data on Enrollment, Premiums, and Cost-Sharing in HSA-Qualified Health Plans, by
Chris L. Peterson.
6 For additional information, see CRS Report RL33257, Health Savings Accounts: Overview of
Rules for 2007
, by Bob Lyke.

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Summary of General Features of FSAs, HRAs, HSAs, and MSAs, 20067
Health Care Flexible Spending
Health Reimbursement Accounts
Health Savings Accounts
Medical Savings Accounts
Accounts (FSA)
(HRA)
(HSA)
(Archer MSA)
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. Ineligible individuals may
insurance who are employees of a
included.
included.
keep previously established accounts
small employer (50 or fewer workers)
but cannot make contributions.
with a high deductible plan or self-
Employers not restricted by size.
Employers not restricted by size.
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
$1,100; the family deductible must
$1,900 but not over $2,850; the family
insurance
with high deductible health insurance.
be at least $2,200. Annual out-of-
deductible must be at least $3,750 but
pocket expenses for covered benefits
not over $5,650. Annual out-of-pocket
cannot exceed $5,500 for self-only
expenses for covered benefits cannot
coverage and $11,000 for family
exceed $3,750 and $ 6 , 9 0 0 ,
coverage. Deductible need not apply
respectively. Deductible need not
to preventive care.
apply to preventive care if absence of
deductible is required by state law.
Contributions
By employer, employee, or both.
Only
by
employer.
By any person on behalf of
an
By employer or account owner, but
Usually funded by employee through
eligible individual.
not both.
salary reduction agreement.
Annual contribution
None required, though employers
None required. Employers usually set
$2,850 for self-only coverage and
65% of the deductible for self-only
limits
usually impose a limit.
their contributions below the annual
$5,650 for family coverage.
coverage and 75% of the deductible
deductible of the accompanying health
Account owners 55 years old or older
for family coverage.
insurance.
and not in Medicare can contribute an
additional $800 in 2007.
7 Rules are expressed in general terms. Not all details are shown.

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Health Care Flexible Spending
Health Reimbursement Accounts
Health Savings Accounts
Medical Savings Accounts
Accounts (FSA)
(HRA)
(HSA)
(Archer MSA)
Qualifying expenses
Most unreimbursed medical expenses,
Most unreimbursed medical expenses,
Mo st unreimb ursed med ical
Most unreimbursed medical expenses.
though employers may impose
though employers may impose
expenses. May be used for premiums
May be used for premiums for long-
additional limitations. May not be used
additional limitations. May be used for
for long-term care insurance,
term care insurance, COBRA, and
for long-term care or health insurance
long-term care and health insurance
COBRA, health insurance for those
health insurance for those receiving
premiums.
premiums, if the employer allows.
r e c e i v i n g u n e m p l o y m e n t
unemployment compensation under
compensation under federal or state
federal or state law.
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 withdrawals
10% penalty except in cases of
15% penalty except in cases of
disability, death, or attaining age 65.
disability, death, or attaining age 65.
Carryover of unused
Balances remaining at year’s end (or
Permitted, although some employers
Full amount may be carried over
Full amount may be carried over
funds
up to 2½ months after year’s end, if
limit amount that can be carried over.
indefinitely.
indefinitely.
employer permits) are forfeited to
A limited, one-time rollover to an HSA
employer. A limited, one-time
is allowed.
rollover to an HSA is allowed.
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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Some Issues
Consumer-Driven Health Care. When the accounts discussed in this report are
paired with high deductible insurance, they become what some call “consumer driven
health plans” (CDHP).8 One objective of CDHPs is to allow owners to choose health care
providers and services themselves, not constrained by managed care restrictions. Another
is to give owners a financial incentive to save for future health care expenses in exchange
for accepting the greater risk of a higher insurance deductible. In theory, CDHPs will
slow health care spending and encourage cost-effective care. The extent to which these
objectives will be borne out is not clear, largely because the two accounts most likely to
be effective in these respects, HRAs and HSAs, are still too new to permit adequate
assessment. Much depends on how high the insurance deductibles are, how much money
is put into the accounts and by whom, whether accounts are used to pay for expenditures
other than health care (when allowed), and whether people with accounts can make
informed choices. Additional key questions are how much competition there is among
health care providers and whether prices for health care are or can be transparent.
Equity. The tax savings associated with tax-advantaged health care accounts
depend on the taxpayers’ marginal tax rates; for federal income taxes alone, these vary
from 10% for married couples filing joint returns who have taxable incomes not
exceeding $15,650 up to 35% for married couples filing joint returns who have taxable
incomes over $349,700. (These figures are for the 2007 tax year; other figures apply to
taxpayers with different filing status.) As a consequence, the accounts discussed in this
report are more attractive for higher-income taxpayers; indeed, some consider HSAs more
as a vehicle for building retirement income than paying for health care. Critics of these
accounts might argue that it is unfair for public health care subsidies (the forgone tax
revenue) to flow disproportionately to higher income taxpayers, particularly since they
generally have more resources to spend on health care in the first place. However, if the
accounts are paired with high deductible insurance, it might be argued that the tax savings
are appropriate for taking on more greater financial risk and using less health care (to the
extent this actually occurs). The latter arguments do not apply to FSAs when taxpayers
do not have high deductible insurance; these accounts subsidize first-dollar payments for
health care and may increase health care spending. As FSAs are available only through
employer plans, they likely appear inequitable to taxpayers who cannot have them.
Targeted Savings Accounts. Current law provides multiple tax-advantaged
savings accounts for education and retirement, as well as health care. It may be simpler
and more effective to have fewer accounts that would be available for a variety of
expenses, perhaps as President Bush once proposed. The President’s Advisory Panel on
Federal Tax Reform recommended in 2005 that MSAs, HSAs, and FSAs be replaced by
new Save for Family accounts that could be used for health care and education expenses;
these would have $10,000 annual contribution limits. The President’s FY2008 budget
would eliminate FSAs and HRAs as a consequence of replacing the exclusion for
employer-paid coverage with new health insurance standard deductions.
8 HSA and MSA plans require high deductible insurance when contributions are made, though
owners can retain accounts after switching to plans with lower deductibles. There is no legal
requirement for HRAs to be associated with high deductible coverage, though they usually are.
FSAs do not require high deductible insurance.