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Tax-Advantaged Accounts for Health Care
Expenses: Side-by-Side Comparison
Bob Lyke

Chris L. Peterson
Specialist in Health Care Financing
March 26, 2009
Congressional Research Service
7-5700
www.crs.gov
RS21573
CRS Report for Congress
P
repared for Members and Committees of Congress
c11173008

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Tax-Advantaged Accounts for Health Care Expenses: Side-by-Side Comparison

Summary
Health Savings Accounts (HSA) are the most recent 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 2009. The report concludes with a brief discussion of equity and
several other issues. It will be updated when relevant statutory or regulatory changes occur, when
new data become available, and as Congress considers issues associated with health care reform.

Congressional Research Service

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Tax-Advantaged Accounts for Health Care Expenses: Side-by-Side Comparison

Contents
Brief Summaries and Background ............................................................................................... 1
Some Issues ................................................................................................................................ 5
Consumer-Driven Health Care .............................................................................................. 5
Equity ................................................................................................................................... 5
Targeted Savings Accounts.................................................................................................... 5
Health Care Reform .............................................................................................................. 6

Tables
Table 1. Summary of General Features of FSAs, HRAs, HSAs, and MSAs, 2009 ........................ 3

Contacts
Author Contact Information ........................................................................................................ 6
Additional Author Information .................................................................................................... 6

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Tax-Advantaged Accounts for Health Care Expenses: Side-by-Side Comparison

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
Flexible Spending Accounts (FSA). Health care 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 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, 2010, could be reimbursed from the
FSA for 2009). 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 initially
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.
On August 3, 2007, the IRS issued new proposed rules that were to be generally effective on
January 1, 2009, though taxpayers could have adopted them sooner.3 These rules have not yet
been finalized. According to a 2006 survey by Mercer Human Resources Consulting, 81% of
employers with 500 or more employees offered a health care FSA, and an average of 20% of
eligible employees participated. The offer rate in small firms is much lower. Public sector
employees often have access to health care FSAs, too.
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.

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/pub/irs-pdf/p969.pdf.
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 Federal Register, vol. 50 no. 50 (August 6, 2007), p. 43938.
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Tax-Advantaged Accounts for Health Care Expenses: Side-by-Side Comparison

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 $1,150 for self-only coverage and $2,300 for family coverage, plus other criteria) and
no other coverage including Medicare, with some exceptions. Contributions are limited to $3,000
for self-only coverage and $5,950 for family coverage. An additional contribution of $1,000 is
allowed people age 55 and older. (The dollar amounts in the last several sentences are for 2009.)
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 a 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 2008,
about 6.1 million people were covered by HSA-high deductible health plans. The number
includes policy-holders (not all of whom may have had HSAs) 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 is Department of the Treasury and IRS revenue guidance 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
generally subject to an additional 15% penalty. 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). The legislation generally limited the total number to 750,000 (not counting
accounts of owners who were previously uninsured, among others), though for tax year 2003
(probably the high point), the IRS estimated there were fewer than 80,000 accounts in total. 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.

4 IRS Revenue Ruling 2002-41 and Notice 2002-45.
5 The number is based on a survey by America’s Health Insurance Plans. For more information, see
http://www.ahipresearch.org/pdfs/2008_HSA_Census.pdf.
6 For additional information, see CRS Report RL33257, Health Savings Accounts: Overview of Rules for 2009, by Bob
Lyke.
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Table 1. Summary of General Features of FSAs, HRAs, HSAs, and MSAs, 2009
Health Care Flexible
Spending
Health Reimbursement
Health Savings Accounts
Medical Savings Accounts

Accounts (FSA)
Accounts (HRA)
(HSA)
(Archer MSA)
Eligibility
Employees whose
Employees whose employers
Individuals with qualifying health
Individuals with qualifying health insurance
employers offer this benefit. offer this benefit. Former
insurance. Ineligible individuals may keep
who are employees of a small employer (50
Former employees may be
employees may be included.
previously established accounts but
or fewer workers) with a high deductible
included.
cannot make contributions.
plan or self-employed. Ineligible individuals
may keep previously established accounts
Employers not restricted by Employers not restricted by size.
but cannot make contributions.
size.
Definition of
No health insurance
No health insurance
Self-only deductible must be at least
Self-only deductible must be at least
qualifying health requirements.
requirements, although HRAs are $1,150; the family deductible must be
$2,000 but not over $3,000; the family
insurance
usually combined with high
at least $2,300.. Annual out-of-pocket
deductible must be at least $4,000 but not
deductible health insurance.
expenses for covered benefits cannot
over $6,050. Annual out-of-pocket expenses
exceed $5,800 for self-only coverage
for covered benefits cannot exceed $4,000
and $11,600 for family coverage.
and $7,350 respectively. Deductible need
Deductible need not apply to preventive
not apply to preventive care if absence of
care.
deductible is required by state law.
Contributions
By employer, employee, or
Only by employer.
By any person on behalf of an eligible
By employer or account owner, but not
both. Usual y funded by
individual.
both.
employee through salary
reduction agreement.
Annual
None required, though
None required. Employers
$3,000 for self-only coverage and
65% of the deductible for self-only
contribution
employers usual y impose a
usual y set their contributions
$5,950 for family coverage. Account
coverage and 75% of the deductible for
limits
limit.
below the annual deductible of
owners 55 years old or older and not in
family coverage.
the accompanying health
Medicare can contribute an additional
insurance.
$1,000 in 2009.
Qualifying
Most unreimbursed medical
Most unreimbursed medical
Most unreimbursed medical expenses.
Most unreimbursed medical expenses. May
expenses
expenses, though employers expenses, though employers may May be used for premiums for long-term
be used for premiums for long-term care
may impose additional
impose additional limitations. May care insurance, COBRA, health insurance insurance, COBRA, and health insurance for
limitations. May not be used be used for long-term care and
for those receiving unemployment
those receiving unemployment
for long-term care or health health insurance premiums, if the compensation under federal or state law, compensation under federal or state law.
insurance premiums.
employer allows.
and health insurance (other than Medigap
policies) for individuals who are 65 years
of age and older.
CRS-3

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Health Care Flexible
Spending
Health Reimbursement
Health Savings Accounts
Medical Savings Accounts

Accounts (FSA)
Accounts (HRA)
(HSA)
(Archer MSA)
Al owable non-
None
None
Permitted, subject to income tax and
Permitted, subject to income tax and 15%
medical
10% penalty except in cases of disability,
penalty except in cases of disability, death,
withdrawals
death, or attaining age 65.
or attaining age 65.
Carryover of
Balances remaining at year’s
Permitted, although some
Full amount may be carried over
Full amount may be carried over indefinitely.
unused funds
end (or up to 2½ months
employers limit amount that can
indefinitely.
after year’s end, if employer be carried over. A limited, one-
permits) are forfeited to
time rollover to an HSA is
employer. A limited, one-
allowed.
time rollover to an HSA is
allowed.
Portability Balances
generally
forfeited
At discretion of employer,
Portable. Portable.
at termination, although
though subject to COBRA
COBRA extensions
provisions.
sometimes apply.
Note: Rules are expressed in general terms. Not all details are shown.
CRS-4

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Tax-Advantaged Accounts for Health Care Expenses: Side-by-Side Comparison

Some Issues
Consumer-Driven Health Care
When the accounts discussed in this report are paired with high deductible insurance, they
become part of what some call “consumer driven health plans” (CDHP).7 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, notwithstanding some early data. 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 $16,700 up to 35% for married couples
filing joint returns who have taxable incomes over $372,950. (These figures are for the 2009 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 a vehicle for building retirement income than paying for health care. Critics of these
accounts 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

7 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.
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Tax-Advantaged Accounts for Health Care Expenses: Side-by-Side Comparison

available for a variety of expenses, as a number of policy makers and analysts have proposed. In
2005, for example, the President’s Advisory Panel on Federal Tax Reform recommended 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. On the
other hand, accounts used for a variety of expenses could be difficult to integrate with the
objectives of separate policy areas. For example, the higher contribution limits for general
purpose accounts could conflict with attempts to limit tax-advantaged, first-dollar spending in
health care.
Health Care Reform
The 111th Congress is considering whether to address health care reform. At the present time, it is
difficult to foresee what consideration most reform proposals will give to the accounts discussed
in this report. However, it is possible that a new comprehensive health care system would
terminate some or all of the accounts since they might no longer be necessary. On the other hand,
the accounts remain popular with some taxpayers, and some policy makers might consider them
useful for helping individuals and families control their health care expenditures.

Author Contact Information

Bob Lyke
Chris L. Peterson

Specialist in Health Care Financing

cpeterson@crs.loc.gov, 7-4681


Additional Author Information
This report is co-authored by Bob Lyke, who currently is working as a contractor for CRS. He can be
reached at rlyke@crs.loc.gov, 7-7355.



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