A Comparison of Tax-Advantaged Accounts for Health Care Expenses

A Comparison of Tax-Advantaged Accounts for Health Care Expenses

A Comparison of Tax-Advantaged Accounts for May 3, 2021
Health Care Expenses
Ryan J. Rosso
Individuals can use three common categories of tax-advantaged accounts to pay for certain
Analyst in Health Care
unreimbursed medical expenses:
Financing


Health flexible spending arrangements (FSAs), an employer-established benefit
primarily funded by employees through salary-reduction agreements

 Health reimbursement arrangements (HRAs), an employer-established benefit
funded by employers
 Health savings accounts (HSAs), which are paired with certain high-deductible health plans (HDHPs) and
can be funded by individuals, employers, or both.
Eligibility for FSAs and HRAs is tied to whether an individual’s employer offers the account as a benefit. These accounts are
generally part of a range of employee benefits that employers may offer. In contrast, HSAs are not necessarily provided
through employers (although employers can incorporate HSAs as part of a benefits package). In other words, eligible
individuals may establish and contribute to HSAs outside of the employment setting or irrespective of being employed.
The three categories of accounts generally share two tax advantages: (1) employer contributions (and , where applicable,
certain employee contributions) toward the aforementioned tax-advantaged accounts can be excluded from an employee’s
gross income and from payroll taxes and (2) withdrawals from such accounts may be tax-free if such amounts are used to pay
for qualified medical expenses. (HSAs have additional tax advantages.)
Each type of account has a different set of medical expenses that would be considered qualified medical expenses, but all
three account types generally consider, at minimum, the following to be qualified medical expenses: the costs of diagnosis,
cure, mitigation, treatment, or prevention of disease and the costs for treatments affecting any part of the body; the amounts
paid for transportation to receive medical care; and qualified long -term-care services. For example, costs for ambulances,
body scans, and chiropractors would fall within the definition of medical care, whereas personal-use expenses (e.g.,
toothpaste) and general health expenses (e.g., weight-loss programs) generally would not. Qualified medical expenses include
only unreimbursed amounts (i.e., they do not include amounts paid by insurance companies for medical care).
Outside of these general similarities, the three categories of tax-advantaged accounts have many different features. Features
specific to each account category include eligibility, the qualifying health insurance associated with the account (if any),
contribution limits, the types of medical care considered qualifying medical expenses, the ability to carry over funds from one
year to the next, the ability to invest account balances, and the extent to which funds are available to an individual upon
termination of employment.
For context, the 2017 Bureau of Labor Statistics National Compensation Survey estimated that, in 2017, approximately 53%
of privately employed individuals with health insurance had an FSA, approximately 10% of privately employed individuals
with health insurance had a plan with an HRA, and approximately 21% of privately employed individuals with health
insurance had a plan with an HSA. This is the most recent year for which these data are available.
This report provides a brief summary of each tax-advantaged account for health care expenses, highlighting key aspects
regarding eligibility, contributions, withdrawals, and the treatment of unused balances for that particular account, as well as
data on availability and use. It also provides a side-by-side comparison of these accounts along related topics.

Congressional Research Service

link to page 4 link to page 5 link to page 6 link to page 6 link to page 6 link to page 7 link to page 8 link to page 9 link to page 10 link to page 11 link to page 11 link to page 11 link to page 12 link to page 12 link to page 13 link to page 13 link to page 14 link to page 14 link to page 16 link to page 16 link to page 17 link to page 17 link to page 19 link to page 26 A Comparison of Tax-Advantaged Accounts for Health Care Expenses

Contents
Introduction ................................................................................................................... 1
Health Flexible Spending Arrangements ............................................................................. 2
Eligibility ................................................................................................................. 3
Qualifying Insurance............................................................................................. 3
Contributions ............................................................................................................ 3
Qualifying Medical Expenses ...................................................................................... 4
Treatment of Unused Balances..................................................................................... 5
Data on Availability and Use ....................................................................................... 6
Health Reimbursement Arrangements ................................................................................ 7
Eligibility ................................................................................................................. 8
Qualifying Insurance............................................................................................. 8
Contributions ............................................................................................................ 8
Qualifying Medical Expenses ...................................................................................... 9
Treatment of Unused Balances..................................................................................... 9
Data on Availability and Use ..................................................................................... 10
Health Savings Accounts ................................................................................................ 10
Eligibility ............................................................................................................... 11
Qualifying Insurance........................................................................................... 11
Contributions .......................................................................................................... 13
Qualifying Medical Expenses .................................................................................... 13
Treatment of Unused Balances................................................................................... 14
Data on Availability and Use ..................................................................................... 14

Tables
Table 1. Summary of General Rules for Health Care-Related Tax-Advantaged Accounts .......... 16

Contacts
Author Information ....................................................................................................... 23

Congressional Research Service

A Comparison of Tax-Advantaged Accounts for Health Care Expenses

Introduction
There are three common categories of tax-advantaged accounts that individuals can use to offset
their health care costs:1
 Health flexible spending arrangements (FSAs)2
 Health reimbursement arrangements (HRAs)3
 Health savings accounts (HSAs)4
Developmental y, these accounts are somewhat distinct from one another. FSAs developed out of
provisions included in the Revenue Act of 1978 (P.L. 95-600) that codified the tax treatment of
employee benefits provided through salary-reduction agreements, a mechanism employers can
use to offer a variety of tax-advantaged benefits to their employees.5 HRAs were defined formal y
through a notice released by the Internal Revenue Service (IRS) in 2002.6 Since then, both
Congress and the IRS have established different categories of HRAs, with the goal of
incentivizing employers and expanding employers’ ability to offer HRAs to their employees.7
HSAs were first authorized in the Medicare Prescription Drug, Improvement, and Modernization
Act of 2003 (P.L. 108-173) as a way to help people save and pay for unreimbursed medical
expenses, such as health insurance cost sharing (e.g., deductibles, co-payments, and coinsurance)

1 T o facilitate easy reading, this report often uses the term account to refer collectively to both certain tax-advantaged
accounts and certain tax-advantaged arrangem ents.
2 Flexible spending arrangements (FSAs) also may be offered for dependent -care expenses. T his report covers only
health FSAs and often refers to such arrangements simply as FSAs.
3 Multiple types of health reimbursement arrangements (HRAs) exist. T his report covers group health plan HRAs,
qualified small employer HRAs (QSEHRAs), individual coverage HRAs (ICHRAs), excepted benefit HRAs, and
retiree-only HRAs.
4 In addition to these three account categories, there are Archer medical savings accounts (MSAs). In general, Archer
MSAs can be thought of as an older, more restrictive version of HSAs that are similarly paired with certain high -
deductible health plans (HDHPs). Since December 31, 2007, individuals generally have not been able to open new
Archer MSAs, except for limited instances. As a result, few Americans currently and actively contribute to this type of
account ; in 2018, 4,495 tax forms reported an Archer MSA that received employer contributions and 13,221 tax forms
reported an Archer MSA that received individual contributions. From a budget ary standpoint, the Joint Committee of
T axation estimated Archer MSAs would reduce federal revenues by less than $50 million from 2020 through 2024.
Due to their limited use, Archer MSAs have been excluded from this report. 26 U.S.C. §220; Internal Revenue Service
(IRS), Statistics of Incom e—2018 Individual Income Tax Returns Line Item Estim ates, Publication 4801 (Rev. 09-
2020), p. 192, at https://www.irs.gov/pub/irs-pdf/p4801.pdf; and U.S. Congress, Joint Committee on T axation,
Estim ates of Federal Tax Expenditures for Fiscal Years 2020 -2024, committee print, prepared by Joint Committee on
T axation, 116th Cong., 2nd sess., November 5, 2020, JCX-23-20, p. 20.
5 T he Revenue Act of 1978 did not define the specific benefits that could be made available under a salary -reduction
agreement. T he IRS first formally acknowledged FSAs and discussed the rules around such benefit in the context of
salary-reduction agreements in IRS, “ Internal Revenue Service News Release IR-84-22,” Announcement 84-24, I.R.B.
1984-10, 39, January 1, 1984; and IRS, “ T ax T reatment of Cafeteria Plans,” 49 Federal Register 19321, May 7, 1984.
6 IRS, “Part III: Administrative, Procedural, and Miscellaneous—Health Reimbursement Arrangements,” Notice 2002-
45, at https://www.irs.gov/pub/irs-drop/n-02-45.pdf. Hereinafter, IRS, Notice 2002-45.
7 QSEHRAs were established by Congress in the 21st Century Cures Act (P.L. 114-255), which became law in 2016,
and ICHRAs and excepted benefit HRAs were established by the IRS through regulations issued in 2019. IRS,
Department of the T reasury, Employee Benefits Security Administration, Department of Labor; Department of Health
and Human Services, Centers for Medicare & Medicaid Services (CMS), “Health Reimbursement Arrangements and
Other Account -Based Group Health Plans,” 84 Federal Register 28934, July 20, 2019 (hereinafter, IRS, “ Health
Reimbursement Arrangements”). See report on H.R. 5447, which included language similar to the 21st Century Cures
Act QSEHRA language, U.S. Congress, House Committee on Ways and Means, Sm all Business Health Care Relief Act
of 2016, 114th Cong., 2nd sess., June 21, 2016, H.Rept. 114-634 (Washington: GPO, 2016).
Congressional Research Service
1

A Comparison of Tax-Advantaged Accounts for Health Care Expenses

and services not covered by insurance. When combined with high-deductible health plans
(HDHPs), HSAs are seen as one of the primary types of consumer-driven health care, where more
of the initial costs for utilized medical care are placed on the consumer to promote more cost-
conscious behaviors.
Notwithstanding these distinct histories, the three accounts often are considered together due to
their similar (though not identical) abilities to pay for unreimbursed medical expenses, their tax-
advantaged status, and their structures.
Individuals general y are eligible to participate in FSAs or HRAs only through their employers.
These accounts typical y are part of a range of employee benefits that employers may offer. In
general, employers offer FSAs and HRAs in addition to employer-sponsored health insurance
coverage or as a method to facilitate the purchase of health insurance coverage.
In contrast, HSAs are not necessarily provided through employers (although employers can
include them as part of a benefits package). In other words, eligible individuals may establish and
contribute to HSAs outside of the employment setting or irrespective of being employed. HSAs
are paired with certain HDHPs.8
Although often paired with or offered alongside health insurance coverage, these three categories
of tax-advantaged accounts do not function like health insurance coverage, in the traditional
sense. Operational y, the accounts are more similar to other tax-advantaged savings accounts
(e.g., individual retirement arrangements, 401[k]s) than to traditional health insurance coverage.
For example, after an individual (or an individual’s employer) establishes the account,
contributions are put into the account and withdrawals are taken out of the account (so long as
there is a balance). There are rules about who can establish an account, when an individual (or
employer) can establish an account, when contributions can be made, how much can be
contributed, in what circumstances withdrawals can be made, and what tax advantages exist for
an account. Such rules vary by account. As such, the three categories of accounts have different
tax implications.
This report provides a brief summary of each tax-advantaged account for health care expenses,
highlighting key aspects regarding eligibility, contributions, withdrawals, and the treatment of
unused balances for that particular account, as wel as data on availability and use. It also
provides a side-by-side comparison of these accounts and covers the following topics: setting up
an account, contributing to an account, withdrawing funds from an account, and closing an
account. The table general y includes the information presented in the body of the report.
Health Flexible Spending Arrangements
Health FSAs are employer-established benefits that reimburse employees for certain medical
expenses. FSAs usual y are funded by employees through a salary-reduction agreement under a
cafeteria plan; a cafeteria plan al ows employees to choose between cash (typical y as part of
their paychecks and therefore taxable) or a nontaxable benefit (in this case, contributions to an

8 T o be paired with a health savings account (HSA), the HDHP must meet certain cost -sharing requirements, including
having a high enough deductible. Specifically, the HDHP must (1) have a deductible above a certain threshold ($1,4 00
for single coverage and $2,800 for family coverage in 2021), (2) limit out -of-pocket expenditures for covered benefits
to an amount below a certain threshold ($7,000 for single coverage and $14,000 for family coverage in 2021), and (3)
cover only preventive care services and telehealth services before the deductible is met.
Congressional Research Service
2

A Comparison of Tax-Advantaged Accounts for Health Care Expenses

FSA).9 FSAs also can be funded by nonelective employer contributions. In this instance, the
employee does not have the choice between taxable cash or a nontaxable benefit.
Employee and employer FSA contributions are excluded from an employee’s wages and therefore
are not subject to federal income or payroll taxes.10
Eligibility
FSAs general y are available only to current employees of an employer offering this benefit. Self-
employed individuals are not eligible to establish and contribute to FSAs.11 In offering this
benefit, employers may establish additional eligibility requirements.
Qualifying Insurance
FSAs general y are offered alongside employer-sponsored health insurance, but employees
typical y are not required by law to enroll in the employer-sponsored group health insurance
coverage (or in any specific type of coverage) in order to enroll in the FSA.12 Employers may
choose to limit FSA eligibly to only those employees enrolled in the employer’s sponsored plan.13
Contributions
FSA contributions can be made by employees (i.e., salary-reduction agreements as part of
cafeteria plans), employers (i.e., nonelective employer contributions), or some combination of
both.
When FSAs are funded by employees as part of a cafeteria plan, employees elect an annual
amount to contribute to their FSAs prior to the start of the year. This amount typical y is taken out
of the employees’ pretax income on a prorated basis throughout the year, such that the sum of
these withdrawals equals the total annual elected amount. In general, the contribution amount
cannot be changed during the year.14 The maximum amount an employee can contribute to a
health FSA is $2,750 in 2021, though employers may establish a lower limit.15

9 As an example of a cafeteria plan, instead of receiving a full salary (say, $40,000), an employee may elect to receive a
reduced salary of $39,100 (subject to federal income and pay roll taxes) and to apply $900 to a benefit (not subject to, or
excluded from, federal income and payroll taxes), such as an FSA.
10 Contributions to FSAs offered through cafeteria plans are tax-exempt under Internal Revenue Code (IRC) §125.
Nonelective employer-funded health FSAs are tax-exempt under IRC §§105 and 106.
11 Self-employed, as defined in IRC §401(c).
12 In the event that the FSA is not offered as a limited excepted benefit, as often is the case, employees would be
required to enroll in an employer-sponsored health insurance plan. An FSA is considered to be a lim ited excepted
benefit if the FSA satisfies the following requirements: the FSA (1) must be offered alongside group plan health
insurance and (2) must provide a benefit that is at most two times an enrollee’s salary-reduction amount. 26 C.F.R.
§54.9831-1(c)(3) and Internal Revenue Service (IRS), “ Application of Market Reform and Other Provisions of the
Affordable Care Act to HRAs, Health FSAs, and Certain Other Employer Healthcare Arrangements,” Notice 2013-54,
at https://www.irs.gov/pub/irs-drop/n-13-54.pdf.
13 Proposed Regulation 26 C.F.R. §1.125-5(g).
14 As an example, an individual may be allowed to change contribution amounts when there is a change in family
status. In light of the Coronavirus Disease 2019 (COVID-19) pandemic and recession, Congress created a temporary
rule that may allow employees to make midyear changes in their FSA contribution amounts (for plan years ending i n
2021). For more information on this ability, see the “ T emporary COVID-19 FSA Rules” text box.
15 Such amount is indexed for inflation in future years. IRS, “26 CFR 601.602: T ax Forms and Instructions,” Revenue
Procedure 2020-45, at https://www.irs.gov/pub/irs-drop/rp-20-45.pdf (hereinafter, IRS, Revenue Procedure 2020 -45).
Congressional Research Service
3

link to page 8 A Comparison of Tax-Advantaged Accounts for Health Care Expenses

Employers also may provide additional contributions, subject to certain limitations.16 In such
cases, employers determine the amount of nonelective employer contributions and provide that
amount in addition to the employee’s contribution (i.e., the employer contribution does not reduce
the employee’s salary).
The total FSA amount must be made available to employees at the start of the year, regardless of
whether the contributions are spread throughout the year. For example, take an employee who
elected to contribute $2,400 to his or her health FSA for a given plan year; if FSA contributions
were paid on a monthly basis, the employee would contribute $200 a month to the FSA. That
employee would be able to access al $2,400 on the first day of the plan year (even though he or
she would have contributed only $200).
Qualifying Medical Expenses
In general, FSA funds can be used only for unreimbursed payments of qualifying medical care
expenses incurred by the employee, the employee’s spouse, the employee’s dependents, and the
employee’s nondependent children younger than 27 years of age at the end of the taxable year.17
FSA qualified medical expenses include al unreimbursed medical care under Internal Revenue
Code (IRC) Section 213(d) (see “Medical Care and Qualified Medical Expenses,” below) and
menstrual care products. FSA qualified medical expenses do not include amounts for the
reimbursement of health insurance premiums, long-term-care coverage or expenses, or anything
covered under another health plan.
Employers may restrict certain types of medical care under IRC Section 213(d) from the list of
eligible qualified medical expenses.18 For example, an employer may disal ow FSA
reimbursements for expenses associated with acupuncture treatments, even though acupuncture is
otherwise considered a qualifying medical care expense under IRC Section 213(d).

16 For the FSA to be considered a limited excepted benefit, employer contributions cannot exceed the amount the
employee contributes to the FSA, unless the employee contributes less than $500 to the FSA, in which case the
employer can contribute up to $500. In addition, FSAs typically are subject to the same contribution nondiscrimination
rules applicable to accident or health plans generally. Specifically, FSAs are subject to the nondiscrimination rules
under IRC §105(h), which state that if a self-insured plan offers tax-free benefits to employees, the plan cannot
discriminate in favor of highly compensated employees. In addition, when offered through a cafeteria plan, FSAs must
satisfy cafeteria plan nondiscrimination rules in IRC §125(b), (c), (e), and (g). 26 C.F.R. §54.9831-1(c)(3)(v)(B);
Proposed Regulation 26 C.F.R. §1.125-1(j).
17 In this context, the term dependent is as defined for tax purposes. A dependent is either (1) a qualifying child or (2) a
qualifying relative. T here are several tests to determine whether an individual is a taxpayer’ s qualifying child or
relative. For more information, see Appendix A in CRS Report R44993, Child and Dependent Care Tax Benefits: How
They Work and Who Receives Them . T echnically, the individual must be either (1) t he taxpayer’s dependent or (2) an
individual whom the taxpayer could have claimed as a dependent except that (a) the individual has gross income that
equals or exceeds the personal exemption amount ($4,300 in 2021, according to the IRS), (b) the individual files a joint
return, or (c) the individual (or his/her spouse, if filing jointly) could be claimed as a dependent on another taxpayer’s
return. IRS, “ Health Savings Accounts and Other T ax -Favored Health Plans,” Publication 969, February 11, 2021, p.
17, at https://www.irs.gov/pub/irs-pdf/p969.pdf (hereinafter, IRS, Publication 969). Gross income amount for 2021 was
published in IRS, Revenue Procedure 2020-45.
18 Proposed Regulation 26 C.F.R. §1.125-5(k)(2).
Congressional Research Service
4

link to page 19 A Comparison of Tax-Advantaged Accounts for Health Care Expenses

Medical Care and Qualified Medical Expenses
Al categories of accounts discussed in this report al ow tax-advantaged withdrawals for qualified medical expenses,
and al three refer to the same definition of medical care that is used for the medical and dental expenses itemized
deduction to determine which withdrawals are considered qualified medical expenses. This definition of medical care
is at Internal Revenue Code (IRC) Section 213(d). Put simply, items that would qualify for the medical and den tal
expenses itemized deduction general y would be considered qualifying medical expenses for the tax-advantaged
accounts discussed in this report.
The definition of medical care at IRC Section 213(d) does not provide an exhaustive list of al items that are
considered medical care; rather, it provides a broad definition of the term medical care to include amounts paid for
“the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure
or function of the body.” It also includes certain transportation and lodging expenditures, amounts paid for health
insurance and qualified long-term-care costs, and limited amounts of long-term-care insurance premiums. As this
definition is interpreted, costs for ambulances, body scans, and chiropractors would fal within the definition of
medical care, whereas, in general, personal-use expenses (e.g., toothpaste) and general health expenses (e.g.,
weight-loss programs) would not. With respect to the Coronavirus Disease 2019 (COVID-19) pandemic, personal
protective equipment, such as masks, hand sanitizers, and sanitizing wipes, is considered within the definition of
medical care if such items are purchased primarily to prevent the spread of COVID-19.
Certain account-specific rules may prevent portions of the IRC Section 213(d) definition from being considered a
qualified medical expense for that particular account. For example, for health savings accounts (HSAs), qualified
medical expenses include al amounts paid for items under the definition of medical care established in IRC Section
213(d) but general y exclude payments for most types of health insurance premiums. Such partial uses of the
definition of medical care vary between the categories of accounts and are noted throughout the report and in
Table 1.
The Internal Revenue Service (IRS)-issued Publication 502 provides more detailed information about what
general y is and is not considered medical care under the medical and dental expenses itemized deduction. As
such, Publication 502 also indicates which items general y are considered a qualifying medical expense for purposes
of the tax-advantaged accounts discussed in this report, though it does not incorporate any account-specific rules.
Furthermore, even though Publication 502 indicates that over-the-counter medicines are not considered medical
care for the medical and dental expenses itemized deduction, such medicines are considered qualifying medical
expenses for purposes of the tax-advantage accounts discussed in this report.
Source: IRC §§213 and 223; IRS, “Amounts Paid for Certain Personal Protective Equipment Treated as
Medical Expenses,” Announcement 2021-7, at https://www.irs.gov/pub/irs-drop/a-21-07.pdf; and IRS, “Medical
and Dental Expenses,” Publication 502, January 8, 2021, at https://www.irs.gov/pub/irs-pdf/p502.pdf.
Notes: Although IRS Publication 502 includes a list of items that are considered medical care, the list does
not include al possible medical expenses.
Treatment of Unused Balances
Participation in a health FSA is tied to a set period of time (plan year), which general y lasts 12
months and does not need to follow the calendar year. When an employer chooses to offer an FSA
as part of a cafeteria plan, the employer general y must select one of three mutual y exclusive
options for handling any unused balances at the end of the plan year:19
 Employees forfeit unused balances, which then revert to the employer
 Employees are given a “grace period” of up to 2½ months after the end of the
plan year. Employees can be reimbursed for expenses incurred during this
additional time. At the end of the grace period, unused amounts are forfeited and
revert to the employer. For example, medical expenses incurred by March 15,

19 Employers are permitted, but not required, to allow military reservists called to active duty to receive some or all of
the remaining funds in their accounts.
Congressional Research Service
5

A Comparison of Tax-Advantaged Accounts for Health Care Expenses

2021, could be reimbursed from FSA contributions for a January-December 2020
plan year
 Employees may carry over a limited amount of unused health FSA funds into the
next FSA plan year (up to $550 in 2020 contributions)20
In general, employees who leave their jobs forfeit their FSA balances. In some instances,
individuals may be able to retain access to their health FSAs through Consolidated Omnibus
Budget Reconciliation Act of 1985 (COBRA) continuation coverage.21
If an employee leaves his or her job mid-plan year having withdrawn more money than
contributed, the employee general y cannot be charged for the negative balance.
Temporary COVID-19 Flexible Spending Arrangement Rules
Congress established temporary rules to address how the COVID-19 pandemic and recession impacted flexible
spending arrangements (FSAs). These rules were included in the Consolidated Appropriations Act, 2021 (P.L. 116-
260).
Under these rules, employers who offer FSAs to their employees are al owed, but not required, to provide any of
the fol owing flexibilities:

Al ow employees to carry over unused FSA balances from FSAs that end in 2020 or 2021

Extend grace periods from 2½ months to 12 months for FSAs that end in 2020 or 2021

Al ow individuals who stop participating in an FSA (e.g., as a result of termination) in calendar year (CY) 2020
or CY2021 to continue to access unused balances through the end of the applicable FSA plan year

Al ow employees to prospectively modify their contribution amounts in the middle of a plan year that ends in
2021
Source: IRS, “Additional Relief for Coronavirus Disease (COVID-19) Under §125 Cafeteria Plans,” Notice
2021-15, at https://www.irs.gov/pub/irs-drop/n-21-15.pdf.
Notes: For an overview of how FSAs could be impacted by the COVID-19 pandemic and recession, see CRS
In Focus IF11576, Potential COVID-19 Impacts on Health Flexible Spending Arrangements (FSAs) and Recent Health
FSA Changes.
Data on Availability and Use
About 16% of nonfederal public and private employers offered FSAs to their employees in
2018.22 Larger employers were more likely to offer FSAs; 12% of firms with 3-24 workers

20 T his amount is indexed for inflation. T he employer may specify a lower carryover amount. IRS, “Section 125
Cafeteria Plans—Modification of Permissive Carryover Rule for Health Flexible Spending Arrangements and
Clarification Regarding Reimbursements of Premiums by Individual Coverage Health Reimburse ment Arrangements,”
Notice 2020-33, at https://www.irs.gov/pub/irs-drop/n-20-33.pdf.
21 Generally, a former employee would be able to sign up for Consolidated Omnibus Budget Reconciliation Act of
1985 (COBRA) FSA coverage if the former employee were eligible for COBRA coverage; the former employer were
subject to COBRA coverage requirements; and the following criteria were met: (1) the FSA was offered as a limited
excepted benefit; (2) the maximum annual COBRA FSA premium was equal to or exceeded the maximum FSA
benefit; and (3) the amount an employee would pay in premiums for the COBRA FSA coverage was less than the
balance in the FSA. 26 C.F.R. §54.4980B-2. For more information on COBRA continuation coverage, see CRS Report
R40142, Health Insurance Continuation Coverage Under COBRA .
22 Gary Claxton et al., Employer Health Benefits, Kaiser Family Foundation, October 3, 2018, pp. 227 -228, at
http://files.kff.org/attachment/Report-Employer-Health-Benefits-Annual-Survey-2018 (hereinafter, Claxton et al.,
Em ployer Health Benefits, 2018).
Congressional Research Service
6

link to page 13 link to page 11 A Comparison of Tax-Advantaged Accounts for Health Care Expenses

offered FSAs, whereas about 35% of firms with 25-199 workers and 76% of firms with 200 or
more workers offered FSAs.23
Based on the 2020 Bureau of Labor Statistics National Compensation Survey, approximately 43%
of privately employed individuals had access to an FSA in March 2020. Individuals employed at
larger firms were more likely than those employed at smal er firms to have access to FSAs, and
employees with higher wages were more likely than those with lower wages to have access to
FSAs.24
With respect to FSA participation, the 2017 Bureau of Labor Statistics National Compensation
Survey found that approximately 53% of privately employed individuals with health insurance
had an FSA in 2017.25 Of privately employed individuals enrolled in non-HDHPs, approximately
66% had an FSA. Of privately employed individuals enrolled in HDHPs, approximately 37% had
an FSA.
Health Reimbursement Arrangements
HRAs are employer-established accounts that can be used to pay or reimburse employees and/or
former employees for qualified medical expenses, including (in some instances) health insurance
premiums. HRAs, unlike FSAs and HSAs, are funded solely by employers; employees cannot
contribute to HRAs.26
There are five types of HRAs:27
 Group health plan HRAs, which are paired with a group health plan (e.g.,
employer-sponsored insurance)28
 Individual coverage HRAs (ICHRAs), which are paired with individual
coverage29
 Qualified small employer HRAs (QSEHRAs), which can be offered by smal
employers and are paired with minimum essential coverage30

23 Claxton et al., Employer Health Benefits, 2018.
24 Bureau of Labor Statistics (BLS), “ T able 40. Financial Benefits: Access, Private Industry Workers, March 2020,” in
National Com pensation Survey: Em ployee Benefits in the United States, March 2020 , Bulletin 2793, September 2020,
at https://www.bls.gov/ncs/ebs/benefits/2020/employee-benefits-in-the-united-states-march-2020.pdf#page=335
(hereinafter, BLS, “ Financial Benefits”).
25 2017 is the most recent year with available data. BLS, National Compensation Survey-Benefits, Series IDs
NBU21500000000000020422, NBU21500000000000020423, NBU21500000000000020432,
NBU21500000000000020433, October 4, 2018, at https://www.bls.gov/ncs/ebs/data.htm.
26 HRA contributions are tax-exempt under IRC §§105 and 106.
27 T hese HRA types may be further structured in an HSA-compatible way (e.g., limited-purpose HRA). As such,
employers could offer a limited-purpose, individual coverage HRA (ICHRA). For more information on the HSA-
compatible variants of HRAs, see the text box titled “ HSA Interactions with Other T ax -Advantaged Arrangements”
under “Health Savings Accounts.”
28 Group health plan refers to plans offered through a plan sponsor, such as an employer or a union.
29 Individual coverage refers to plans that individuals and families buy on their own (i.e., not through a plan sponsor).
For more information on the plans that can be paired with these types of HRAs, see “ Qualifying Insurance.”
30 Minimum essential coverage, as the term is defined at 26 U.S.C. §5000A(f); 26 U.S.C. §106(g). Most types of
comprehensive coverage are considered minimum essential coverage, including public coverage, such as coverage
under programs sponsored by the federal government (e.g., Medicaid, Medicare), as well as private insurance (e.g.,
employer-sponsored insurance and individual insurance).
Congressional Research Service
7

link to page 19 A Comparison of Tax-Advantaged Accounts for Health Care Expenses

 Excepted benefit HRAs, which are more limited than other HRAs and must be
offered alongside employer-sponsored coverage
 Retiree-only HRAs, which are available only to retirees.
These different types of HRAs general y share various features. However, some distinctions are
associated with each HRA type. These distinctions are described below and further specified in
Table 1.
Eligibility
Except for QSEHRAs and retiree-only HRAs, HRAs general y are available to current and former
employees whose employers offer that benefit. QSEHRAs are available only to current
employees of smal businesses offering that benefit. Retiree-only HRAs are available only to
former employees of employers offering that benefit. Self-employed individuals are not eligible
to establish and contribute to HRAs.31
Qualifying Insurance
General y, HRAs must either (1) require that covered individuals be simultaneously enrolled in a
certain type of health insurance coverage (group health plan HRAs, QSEHRAs, and ICHRAs) or
(2) be provided in a more limited manner and offered alongside employee-sponsored insurance
(excepted benefit HRAs). Retiree-only HRAs do not need to satisfy either of these criteria.
For those HRAs in the first category, the health insurance coverage in which covered individuals
can be enrolled does not need to satisfy arrangement-specific cost-sharing requirements (e.g.,
have a high enough deductible); instead, it needs to be a specified type of coverage (e.g., group
health plan, individual coverage, Medicare), and the type varies depending on the HRA.
General y, individuals with group health plan HRAs must be enrolled in a group health plan (e.g.,
employer-sponsored coverage) and individuals with ICHRAs must be enrolled in individual
coverage. Individuals with QSEHRAs must be enrolled in minimum essential coverage, which
general y includes most types of comprehensive coverage (e.g., group coverage, individual
coverage, Medicare, Medicaid).32
Excepted benefit HRAs must be offered alongside employer-sponsored health insurance. Similar
to FSAs, employees are not required by law to enroll in the employer-sponsored group health
insurance coverage (or in any specific type of coverage) in order to enroll in the excepted benefit
HRA.33
Contributions
Only employers can make HRA contributions. For al HRAs except QSEHRAs and excepted
benefit HRAs, there are no statutory contribution limits to the accounts;34 however, employers set

31 Self-employed, as defined in IRC §401(c).
32 For information on the types of plans in which an individual with a QSEHRA can enroll, see IRS, “Appendix A:
T ypes of Minimum Essential Coverage,” in Notice 2017-67 at https://www.irs.gov/pub/irs-drop/n-17-67.pdf
(hereinafter, IRS, Notice 2017-67).
33 IRS, “Health Reimbursement Arrangements”.
34 HRAs generally are subject to the same contribution nondiscrimination rules applicable to accident or health plans
more broadly. Specifically, self-funded HRAs are subject to the nondiscrimination rules under IRC §105(h). IRS,
Notice 2002-45.
Congressional Research Service
8

link to page 19 link to page 7 link to page 8 A Comparison of Tax-Advantaged Accounts for Health Care Expenses

a maximum contribution amount when designing the plan (i.e., the HRA is not an open-ended
benefit).35
Contributions to QSEHRAs are capped at $5,300 for self-only coverage and $10,700 for family
coverage for 2021, though employers may establish lower limits.36 QSEHRA limits must be
prorated for part-year-eligible individuals.37 Contributions to excepted benefit HRAs are capped
at $1,800 for 2021, though employers may establish a lower limit.38
Employers have discretion in when HRA contributions are made (e.g., monthly, annual y). If
contributions are not made annual y, reimbursements can be limited to the balance of the account.
In other words, and unlike FSAs, the total arrangement contribution amount is not required to be
made available on the first day of the arrangement.39 Final y, HRAs general y are notional
accounts; employers need not actual y fund HRAs until employees draw on them.40
Qualifying Medical Expenses
In general, HRA funds can be used only for unreimbursed payments of qualifying medical care
incurred by the employee (current and former), the employee’s spouse (including spouses of
deceased employees), the employee’s dependents (including dependents of deceased employees),
and the employee’s nondependent children younger than 27 years of age at the end of the taxable
year.41 HRA-qualified medical expenses include al items within the definition of medical care
under IRC Section 213(d) and menstrual care products.42 Although health insurance premiums
general y are included in the definition of medical care at IRC Section 213(d), some HRA
categories are not al owed to reimburse for certain types of premiums (see Table 1). As with
FSAs, employers may restrict the types of medical and health services that are eligible for
reimbursement by HRA funds.
For those HRAs that require covered individuals to be simultaneously enrolled in a certain type of
health insurance coverage, individuals must be enrolled in such coverage in order to make
withdrawals from their HRAs.
Treatment of Unused Balances
Unused balances from al types of HRAs may be carried forward, though employers may limit the
aggregate carryovers.43 Carried-over QSEHRA amounts count toward the subsequent year’s

35 IRS, Notice 2002-45.
36 Such amount is indexed to inflation for future years. 26 U.S.C. §9831(d)(2)(B)(iii) and IRS, Revenue Procedure
2020-45.
37 26 U.S.C. §9831(d)(2)(D)(i).
38 Such amount is indexed to inflation for future years. 26 C.F.R. §54.9831 -1(c)(3)(viii)(B) and IRS, “Part III:
Administrative, Procedural, and Miscellaneous—26 C.F.R. 54.9831-1, Special Rules Relating to Group Health Plans,”
Revenue Procedure 2020-43, at https://www.irs.gov/pub/irs-drop/rp-20-43.pdf.
39 IRS, Notice 2002-45.
40 U.S. Government Accountability Office (GAO), Consumer Directed Health Plans: Health Status, Spending, and
Utilization of Enrollees in Plans Based on Health Reim bursem ent Arrangem ents, GAO-10-616, July 2010, p. 7, at
https://www.gao.gov/assets/gao-10-616.pdf.
41 In this context, the term dependent is as defined for tax purposes. See footnote 17.
42 See “Medical Care and Qualified Medical Expenses.”
43 IRS. Notice 2002-45, and IRS, “Health Reimbursement Arrangements,” p. 28888.
Congressional Research Service
9

A Comparison of Tax-Advantaged Accounts for Health Care Expenses

annual contribution limit.44 Carried-over excepted benefit HRA amounts do not count toward the
subsequent year’s annual contribution limit.45
Except for QSEHRAs, if an employee leaves his or her job, the employee may forfeit his or her
HRA balance, unless the employer has structured the HRA so that former employees may access
such funds. In some instances, individuals may be able to retain access to their HRAs through
COBRA continuation coverage.46 For QSEHRAs, employees forfeit their QSEHRA balance once
they leave their jobs.
Data on Availability and Use
Group health plan HRAs are often, though not exclusively, offered alongside HDHPs.47
According to the 2020 Kaiser Family Foundation employer health benefits survey, about 8% of
the nonfederal public and private employers that offered health benefits to their employees in
2020 offered an HDHP paired with an HRA.48 Larger employers (i.e., firms with 200 or more
workers) and smal employers (i.e., firms with 3-199 workers) were equal y likely to offer HRAs
alongside an HDHP.49
Based on the 2017 Bureau of Labor Statistics National Compensation Survey, approximately 10%
of privately employed individuals participating in medical care plans had an HRA in 2017.50 In
that year, approximately 6% of privately employed individuals enrolled in non-HDHPs had an
HRA and approximately 15% of privately employed individuals enrolled in HDHPs had an HRA.
Data on QSEHRAs, ICHRAs, and excepted benefit HRAs are limited due to the recency of those
HRA types.51
Health Savings Accounts
HSAs, another type of tax-advantaged account, are paired with HDHPs and provide individuals
with ways to save and pay for unreimbursed medical expenses.52 Unlike for the other accounts
discussed in this report, eligibility for HSAs is not contingent on an employer offering health

44 IRS, Notice 2017-67.
45 26 C.F.R. §54.9831-1(c)(3)(viii)(B)(2).
46 Not all employers are subject to federal COBRA coverage requirements. For more information on COBRA
continuation coverage, see CRS Report R40142, Health Insurance Continuation Coverage Under COBRA .
47 Unlike HSA-eligible HDHPs, HRA-paired HDHPs do not have to satisfy any requirements (e.g., have a high enough
deductible). In other words, HRAs can be paired with plans that are not HDHPs, as such term is used for HSA
purposes.
48 T he source did not discuss HRAs offered with a non-HDHP plan. Gary Claxton et al., Employer Health Benefits,
Kaiser Family Foundation, October 8, 2020, p. 133, at https://files.kff.org/attachment/Report-Employer-Health-
Benefits-2020-Annual-Survey.pdf (hereinafter, Claxton et al., Em ployer Health Benefits, 2020).
49 Claxton et al., Employer Health Benefits, 2020, p. 134.
50 2017 is the most recent year with available data. BLS, National Compensation Survey-Benefits, Series IDs
NBU21500000000000020422, NBU21500000000000020424, NBU21500000000000020432,
NBU21500000000000020434, October 4, 2018, at https://www.bls.gov/ncs/ebs/data.htm.
51 QSEHRAs were established by the 21st Century Cures Act (P.L. 114-255), which became law in December 2016.
ICHRAs and excepted benefit HRAs were established in a fin al rule issued on June 20, 2019, by the Departments of
Health and Human Services, Labor, and the T reasury. T he final rule generally applies to plan years beginning on or
after January 1, 2020.
52 For more information regarding HSAs, see CRS Report R45277, Health Savings Accounts (HSAs).
Congressional Research Service
10

A Comparison of Tax-Advantaged Accounts for Health Care Expenses

insurance or establishing the account as an employee benefit, although employers may choose to
provide employer contributions and may al ow pretax employee contributions as a benefit to
eligible employees. Relatedly, an HSA is owned by an individual and established with an insurer,
bank, or other IRS-approved trustee. As such, account holders retain access to their HSAs even if
the account holders change jobs or their employers no longer offer HSA benefits to their
employees.53
HSAs have two tax advantages that differentiate them from FSAs and HRAs. First, individuals
may make contributions to their HSAs outside of the employment setting on a post-tax basis;
such contributions are tax-deductible as an above-the-line deduction. Second, unused balances in
an HSA may be invested and account earnings are tax exempt. HSAs have additional tax-
advantages; if an HSA plan is offered by an employer, employer contributions and employee
cafeteria plan contributions are excluded from income and payroll taxes.
Eligibility
Individuals are eligible to establish and contribute to an HSA if they have coverage under an
HSA-eligible HDHP, do not have disqualifying coverage, and cannot be claimed as a dependent
on another person’s tax return.54
Qualifying Insurance
As implied by the name, HSA-eligible HDHPs must meet certain cost-sharing-related
requirements.55 For an HDHP to be HSA-qualified, the plan must
 have a deductible above a certain threshold ($1,400 for single coverage and
$2,800 for family coverage in 2021),56
 limit out-of-pocket expenditures for covered benefits to an amount below a
certain threshold ($7,000 for single coverage and $14,000 for family coverage in
2021),57 and
 cover only preventive care and telehealth services before the deductible is met.
Temporary COVID-19 Health Savings Account Rules
Congress established two temporary rules that sought to address how the COVID-19 pandemic and
corresponding recession impacted HSAs and the high-deductible health plans (HDHPs) that HSAs are paired with.
Both rules were included in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act; P.L. 116-136).
The first rule specified that HSA-qualified HDHPs that begin on or before December 31, 2021, are al owed to
cover telehealth services before the deductible has been met. This requirement applies to telehealth and other

53 An individual’s ability to continue contributing to an HSA remains contingent upon the individual maintaining HSA
eligibility.
54 Disqualifying coverage generally is considered any health plan that is not an HDHP and that provides coverage for
any benefit covered under the HDHP.
55 Cost sharing refers to the amounts an insured individual pays for health care services included under his or her health
plan. A plan’s cost sharing may include deductibles, co-payments, and coinsurance. Cost -sharing requirements include
out-of-pocket limits, which cap the total amount an individual would have to pay (through deductibles, co -payments,
and coinsurance) for covered services. Cost sharing does not include premiums or amounts paid for services not
covered by the plan.
56 T hese amounts are indexed for inflation and adjusted annually. IRS, “26 CFR 601.602: T ax Forms and I nstructions,”
Revenue Procedure 2020-32, at https://www.irs.gov/pub/irs-drop/rp-20-32.pdf (hereinafter, IRS, Revenue Procedure
2020-32).
57 Ibid. T hese amounts are indexed for inflation and adjusted annually.
Congressional Research Service
11

A Comparison of Tax-Advantaged Accounts for Health Care Expenses

remote-care services provided on or after January 1, 2020. This provision was intended to increase health care
access for HSA-qualified HDHP enrol ees who may have COVID-19 and to protect other patients from potential
exposure. As such, if an HSA-qualified HDHP plan administrator initial y responded to the COVID-19 pandemic by
providing telehealth services without a deductible, enrol ees of that plan would not lose their HSA eligibility as a
result of that decision.
The second rule specified that for plan years beginning on or before December 31, 2021, telehealth and other
remote care would not be considered disqualifying health coverage that would prevent an otherwise eligible
individual from being considered HSA-eligible. As such, and under this rule, individuals could be enrol ed in an
HSA-eligible HDHP and in a separate telehealth policy and stil would be eligible to contribute to their HSAs.
Source: IRC §223(c)(2); IRS, “COVID-19 Guidance Under §125 Cafeteria Plans and Related to High-
Deductible Health Plans,” Notice 2020-29, at https://www.irs.gov/pub/irs-drop/n-20-29.pdf; and U.S.
Congress, Senate Committee on Finance, Coronavirus Aid, Relief, and Economic Security Act Subtitle D—
Finance Committee Section-by-Section, committee print, 116th Cong., 2nd Sess., at
https://www.finance.senate.gov/imo/media/doc/CARES%20Act%20Section-by-
Section%20%28Finance%20Health%29.pdf.
Not al HDHPs are HSA-qualified HDHPs. For example, a plan may meet the deductible and out-
of-pocket limit requirements but may cover more than preventive care services and telehealth
services before the deductible is met; this plan would not be considered an HSA-qualified HDHP,
even though it is a plan with a high deductible.
An HSA-eligible HDHP may be an employer-sponsored plan or may be purchased directly by the
individual (i.e., in the individual market).
HSA Interactions with Other Tax-Advantaged Arrangements
Individuals cannot retain the ability to contribute to an HSA if they are enrol ed in both an HSA-eligible HDHP and
disqualifying coverage. Disqualifying coverage general y is considered any health plan that is not an HDHP and that
provides coverage for any benefit covered under the HDHP. Health FSAs and health reimbursement arrangements
(HRAs) that reimburse any medical expenses (including cost sharing) general y would fal within the definition of
disqualifying coverage. As such, an individual would not be considered HSA-eligible if he or she were enrol ed in
both an HSA-eligible HDHP and a health FSA.
However, FSAs and HRAs can be offered in HSA-compatible ways, which would not preclude HSA eligibility. The
fol owing FSAs and HRAs are considered HSA-compatible:

Limited-Purpose FSA or HRA. These arrangements can pay or reimburse only preventive care expenses
and benefits for coverage or insurance under which substantial y al coverage relates to liabilities incurred
under workers’ compensation laws, tort liabilities, or liabilities related to ownership or use of property (such
as automobile insurance); coverage or insurance for a specified disease or il ness; coverage or insurance that
pays a fixed amount per day or other period of hospitalization; and coverage or insurance for accidents,
disability, dental care, vision care, and telehealth and other remote care (for plan years beginning before
2022).

Suspended HRA. This arrangement does not pay or reimburse for any medical expenses during a
suspension period, except for those services that can be paid or reimbursed by a limited-purpose HRA. An
individual may suspend an HRA prior to the start of the HRA coverage period; as a result, the individual
would be HSA-eligible during the suspension period.

Post-deductible FSA or HRA. These arrangements reimburse medical expenses only after the annual
HDHP deductible has been met.

Retirement HRA. This arrangement pays or reimburses only those medical expenses incurred after
retirement. After retirement, an individual would no longer be eligible to contribute to an HSA.

Premium-Only HRA. This arrangement reimburses only premiums for health insurance coverage.

Combinations of These HSA-Compatible Arrangements. For example, a limited-purpose/post-
deductible FSA.
HSA-eligible individuals who also enrol in any of these HSA-compatible tax-advantaged arrangements would retain
their HSA eligibility.
Congressional Research Service
12

link to page 7 link to page 8 A Comparison of Tax-Advantaged Accounts for Health Care Expenses

Source: IRS, “Section 223: Health Savings Accounts—Interaction with Other Health Arrangements,”
Revenue Ruling 2004-45, at https://www.irs.gov/pub/irs-drop/rr-04-45.pdf; IRS, Part III - Administrative,
Procedural and Miscel aneous—Qualified Smal Employer Health Reimbursement Arrangements Notice 2017-
67 at https://www.irs.gov/pub/irs-drop/n-17-67.pdf; and IRS, Department of the Treasury, Employee Benefits
Security Administration, Department of Labor; Department of Health and Human Services, Centers for
Medicare & Medicaid Services (CMS), “Health Reimbursement Arrangements and Other Account-Based
Group Health Plans,” 84 Federal Register 28934, July 20, 2019.
Contributions
Individuals, employers, or both may contribute to HSAs, but the aggregate amount of
contributions is subject to an annual limit.58 In 2021, the annual contribution limits are $3,600 for
those enrolled in self-only coverage and $7,200 for those enrolled in family coverage.59
Individuals aged 55 and older who are not eligible for Medicare are al owed to contribute up to
$1,000 over the HSA contribution limit each year. These amounts may be prorated for part-year-
eligible individuals.60 Whereas the annual contribution limits are indexed to inflation and adjusted
annual y, the additional contributions for those aged 55 and older are not.
Qualifying Medical Expenses
Withdrawals from HSAs are exempt from federal income taxes if used for unreimbursed
qualifying medical care expenses for the account holder, the account holder’s spouse, and the
account holder’s dependents.61 For HSA purposes, qualifying medical care expenses are defined
through reference to the definition of medical care at IRC Section 213(d) and also include
menstrual care products.62 Of the medical expenses mentioned in IRC Section 213(d), health
insurance premiums general y are not considered qualified medical expenses for HSA purposes.
Only the following specified insurance premiums are considered to be qualified HSA expenses:
 Long-term-care insurance
 Health insurance premiums during periods of continuation coverage required by
federal law (e.g., COBRA)
 Health insurance premiums during periods the individual is receiving
unemployment compensation
 For individuals aged 65 and older, any health insurance premiums (including
Medicare Part B premiums) other than a Medicare supplemental policy63

58 Employers contributing to an employee’s HSA are subject to comparability rules, where employers are required to
make comparable contributions to the accounts of similar categories of HSA-eligible employees. Failure to do so
results in an excise tax on the employer contribution amount. Comparability rules do not apply to contributions made
through a cafeteria plan. 26 U.S.C. §4980G and 26 C.F.R. §54.4980G-5.
59 IRS, Revenue Procedure 2020-32.
60 Individuals who are eligible during the last month of the year are treated as if they had been eligible for t hat entire
year and thus are allowed to contribute up to the annual limit , so long as the contribution is before the tax filing date of
the following year and the individual maintains eligibility for the duration of the subsequent tax year. For more
information on this exception, see “ Contribution Limits” in CRS Report R45277, Health Savings Accounts (HSAs).
61 In this context, the term dependent is as defined for tax purposes. See footnote 17.
62 See “Medical Care and Qualified Medical Expenses.” 26 U.S.C. §223(d)(2).
63 As defined in §1882 of the Social Security Act.
Congressional Research Service
13

A Comparison of Tax-Advantaged Accounts for Health Care Expenses

Individuals may withdraw HSA funds to use for other purposes (i.e., not for qualifying medical
care expenses), but these withdrawals are included in the individuals’ gross income and are
subject to a 20% penalty. The penalty is waived in cases of disability or death and for individuals
aged 65 and older.
Withdrawals from an HSA can be made at any time. Unlike some HRAs, an individual need not
be covered by qualifying health insurance in order to withdraw money from an HSA.64
Treatment of Unused Balances
Unused balances in an HSA may be invested and may accumulate without limit. Account
earnings are tax-exempt.
As mentioned above, HSAs are established and owned by the individual. Unlike FSAs and
HRAs, account holders retain access to their HSA even if the account holders change jobs or their
employers no longer offer employee HSA benefits.65
Data on Availability and Use
Data on the total number of HSAs and the number of individuals who have an HSA are not
readily available. However, Devenir Research estimated there were more than 30 mil ion HSA
accounts in December 2019.66
Data on the number of HSAs that receive contributions from employers and employees provide
another measure of the accounts’ use. For 2018, the IRS estimated that 10.2 mil ion tax forms
reported an HSA that received employer contributions and 2.0 mil ion tax forms reported an HSA
that received contributions from individuals.67 According to IRS data, higher-income earners are
more likely than lower-income earners to indicate individual and employer contributions on their
tax returns.68
With respect to employee access to HSAs and based on the 2020 Bureau of Labor Statistics
National Compensation Survey, approximately 32% of privately employed individuals had access
to an HSA in March 2020, which is less than the percentage of employees who had access to
FSAs in the same year. According to the survey, employees at larger firms were more likely than
those at smal er firms to have access to HSAs and employees with higher wages were more likely
than those with lower wages to have access to HSAs.69

64 IRS, “Part III: Administrative, Procedural, and Miscellaneous,” Notice 2004 -2, at https://www.irs.gov/pub/irs-drop/
n-04-2.pdf.
65 An individual’s ability to continue contributing to an HSA remains contingent on the individual maintaining HSA
eligibility.
66 Individuals may have more than one account, and account holders may not have been eligible to contribute to the
HSA at the time of the survey. Devenir Research, 2020 Year-End HSA Market Statistics & Trends Executive Sum m ary,
March 3, 2021, at https://www.devenir.com/wp-content/uploads/2020-Year-End-Devenir-HSA-Research-Report-
Executive-Summary.pdf. Devenir conducts HSA research and provides investment advisory services to the HSA
industry.
67 T hese numbers are not mutually exclusive, nor do they represent the total number of HSAs. For more HSA data
information, see “HDHP Enrollment and HSA Utilization” in CRS Report R45277, Health Savings Accounts (HSAs);
and IRS, Statistics of Incom e—2018 Individual Income Tax Returns Line Item Estim ates, Publication 4801 (Rev. 09-
2020), p. 202, at https://www.irs.gov/pub/irs-pdf/p4801.pdf.
68 CRS Report R45277, Health Savings Accounts (HSAs).
69 BLS, “Financial Benefits.”
Congressional Research Service
14

A Comparison of Tax-Advantaged Accounts for Health Care Expenses

Based on the 2017 Bureau of Labor Statistics National Compensation Survey, approximately 21%
of privately employed individuals with health insurance had a plan with an HSA in 2017.70 Of
those enrolled in HDHPs, approximately 50% of privately employed individuals had an HSA.
Data from the Joint Committee on Taxation estimate that HSAs wil reduce federal revenues by
$66.1 bil ion between FY2020 and FY2024.71

70 2017 is the most recent year with available data. BLS, National Compensation Survey-Benefits, Series IDs
NBU21500000000000020422, NBU2150000000 0000020432, NBU21500000000000020435, October 4, 2018, at
https://www.bls.gov/ncs/ebs/data.htm.
71 U.S. Congress, Joint Committee on T axation, Estimates of Federal Tax Expenditures for Fiscal Years 2020-2024,
committee print, prepared by Joint Committee on T axation, 116th Cong., 2nd sess., November 5, 2020, JCX-23-20, p.
33.
Congressional Research Service
15

link to page 24 link to page 24 link to page 24 link to page 24 link to page 24 link to page 24 A Comparison of Tax-Advantaged Accounts for Health Care Expenses

Table 1. Summary of General Rules for Health Care-Related Tax-Advantaged Accounts
(as applicable for tax year 2021)
Health Flexible Spending
Health Reimbursement

Arrangements (FSAs)
Arrangements (HRAs)
Health Savings Accounts (HSAs)
Setting Up an Account
Eligibility
Employees of an employer that offers this
Group Health Plan HRAs, ICHRAs,
Individuals must have an HSA-eligible
benefit. Self-employed individuals are not
and Excepted Benefit HRAs: Employees
HDHP, must not have disqualifying health
eligible.
of an employer that offers this benefit.
coverage,b and cannot be claimed as a
Former employees of an employer that
dependent on someone else’s tax return.
offers this benefit to former employees.
Self-employed individuals are not eligible.
QSEHRAs: General y, employees of a
smal employer (typical y fewer than 50 ful -
time or ful -time-equivalent workers in the
prior year) that offers this benefit.a Self-
employed individuals are not eligible.
Retiree-Only HRAs: Former employees
of an employer that offers this benefit to
former employees. Self-employed
individuals are not eligible.
Qualifying Health Insurance
None.
Group Health Plan HRAs: Any non-
An HSA-eligible HDHP. Specifical y, any
HRA group health insurance plan that
HDHP that (1) has a deductible of at least
satisfies annual limit and preventive service
$1,400 for self-only coverage and $2,800
requirements.c
for family coverage, (2) has an annual out-
ICHRAs: Any individual market coverage
of-pocket maximum of $7,000 for self-only
that satisfies annual limit and preventive
coverage and $14,000 for family coverage,
service requirements.d
and (3) provides only preventative care and
telehealth services without a deductible or
QSEHRAs: Any health insurance plan that
with a reduced deductible.f Out-of-pocket
is considered minimum essential coverage.e
limits do not include premiums.
Excepted Benefit HRAs and Retiree-
Only HRAs: None.
Annual Cost-of-Living
Not applicable.
Group Health Plan HRAs, ICHRAs,
Yes; adjustments based on the C-CPI-U.
Adjustments for Qualifying
and QSEHRAs: Not applicable (not
Health Insurance Deductibles,
Congressional Research Service
16

link to page 24 link to page 24 A Comparison of Tax-Advantaged Accounts for Health Care Expenses

Health Flexible Spending
Health Reimbursement

Arrangements (FSAs)
Arrangements (HRAs)
Health Savings Accounts (HSAs)
Co-payments, and Other
associated with an insurance policy with
Monetary Provisions
particular cost-sharing requirements).
Excepted Benefit HRAs and Retiree-
Only HRAs: Not applicable.
Individual Choice of Financial
None.
All HRAs: None.
Individuals can establish an account with a
Institution or Trustee
qualified trustee (bank, insurance company,
Administering Accounts
or IRS-approved IRA or Archer MSA
trustee).g
Contributing to an Account
Source of Contributions
General y, by employee (through a salary-
All HRAs: Only by employer.
Eligible individuals, and employers, family
reduction agreement). Employers also may
members, and other individuals may make
contribute.
contributions to an individual’s HSA on his
or her behalf.
If offered, eligible employees may make
contributions through their employer via a
salary-reduction agreement.
Tax Status of Contributions
Employee contributions are made on a
All HRAs: Employer contributions are not
Individual contributions made outside of an
pretax basis through an employer;
included as income.
employment setting are deductible on
contributions are not included as income
account holder’s tax returns, even if
and do not have employment or federal
account holder does not itemize
income taxes withheld.
deductions.
Employer contributions are not included as
Employee contributions made on a pretax
income.
basis through an employer are not included
as income and do not have employment or
federal income taxes withheld. Pretax
employee contributions are not deductible
on account holder’s tax return.
Employer contributions are not counted as
income and are not deductible on account
holder’s tax return.
Annual Contribution Limits
As typical y offered as a limited excepted
Group Health Plan HRAs, ICHRAs,
$3,600 for self-only coverage and $7,200
benefit, individual limit of $2,750 a year per
and Retiree-Only HRAs: No statutory
for family coverage.i
employer. Employers may set lower limits.
limit for employer contributions.
Congressional Research Service
17

link to page 24 link to page 24 link to page 24 link to page 24 link to page 24 link to page 24 A Comparison of Tax-Advantaged Accounts for Health Care Expenses

Health Flexible Spending
Health Reimbursement

Arrangements (FSAs)
Arrangements (HRAs)
Health Savings Accounts (HSAs)
Employer contributions cannot exceed the
QSEHRAs: $5,300 for self-only coverage
Account holders who are at least 55 years
amount of the employee contribution to
and $10,700 for family coverage.h
of age and are not enrol ed in Medicare
the FSA, unless the employee contributes
Employers may set lower limits.
may contribute an additional “catch-up”
less than $500 to the FSA, in which case
Excepted Benefit HRAs: Individual limit
contribution of $1,000.j
the employer can contribute up to $500.
of $1,800 a year per employer. Employers
may set lower limits.
Annual Cost-of-Living
Yes; adjustments based on the C-CPI-U.
Group Health Plan HRAs, ICHRAs,
General y, yes; adjustments based on the
Adjustments for Contribution
and Retiree-Only HRAs: Not applicable.
C-CPI-U. The “catch-up” contribution is
Limits
QSEHRAs and Excepted Benefit
not annual y adjusted.
HRAs: Yes; adjustments based on the
C-CPI-U.
Tax Status of Interest Earned
Not applicable (account balances may not
All HRAs: Not applicable (account
Not taxed.
on Account Assets
be invested).
balances may not be invested).
Al owable Rol overs from
None.
All HRAs: None.
One rol over from an Archer MSA or
Other Tax-Advantaged

another HSA in a one-year period, which
Accounts
does not count toward contribution limit.
One rol over from a traditional or Roth
IRA in a lifetime, which counts toward
contribution limit.g
Withdrawing Funds from an Account
When Funds Are Available
Al funds are available on the first day of the All HRAs: Funds are available as they are
Funds are available as they are deposited.
plan year.
deposited.
Qualifying Health Insurance
Not applicable.
Group Health Plan HRAs, ICHRAs,
No.
Enrol ment Necessary for
and QSEHRAs: Employee and others
Withdrawal
covered by the HRA must be enrol ed in
qualifying health insurance.
Excepted benefit HRAs and retiree-only HRAs:
Not applicable.
Qualifying Medical Expenses
Most unreimbursed medical expenses
Group Health Plan HRAs: Most
Most unreimbursed medical expenses
included in IRC §213(d) and menstrual care
unreimbursed medical expenses included in
included in IRC §213(d), including amounts
products.
IRC §213(d), including health insurance
paid for long-term-care coverage,k health
premiums, and amounts paid for long-term-
care continuation coverage required under
care coverage.k Menstrual care products
federal law (e.g., COBRA),m health
Congressional Research Service
18

link to page 24 link to page 24 link to page 24 link to page 24 link to page 25 link to page 25 link to page 25 link to page 25 A Comparison of Tax-Advantaged Accounts for Health Care Expenses

Health Flexible Spending
Health Reimbursement

Arrangements (FSAs)
Arrangements (HRAs)
Health Savings Accounts (HSAs)
May not be used for health insurance
also are considered a qualifying medical
insurance for those receiving
premiums, long-term-care coverage or
expense.
unemployment compensation under federal
expenses,k or amounts covered under
May not be used to purchase individual
or state law, and if the account holder is 65
another health plan.
market coverage.
years of age or older, Medicare and other
health care coverage (excluding Medigap
ICHRAs, QSEHRAs, and Retiree-Only
and other private Medicare supplemental
HRAs: Most unreimbursed medical
insurance). Menstrual care products also
expenses listed in IRC §213(d), including
are considered a qualifying medical expense.
health insurance premiums,l and amounts
paid for long-term-care coverage.k
May not be used for health insurance
Menstrual care products also are
premiums not mentioned above.
considered a qualifying medical expense.

Excepted Benefit HRAs: Most
unreimbursed medical expenses qualified by
IRC §213(d), including amounts paid for
health care continuation coverage (e.g.,
COBRA),m and, general y, short-term,
limited-duration insurance.n Menstrual care
products also are considered a qualifying
medical expense.
May not be used for Medicare premiums
or, general y, individual health insurance
coverage premiums or group health plan
premiums.
Ability of Employer to Further Employers may impose additional
All HRAs: Employers may impose
Not possible.
Restrict Qualifying Medical
limitations on what is considered a
additional limitations on what is considered
Expenses
qualifying medical expense.
a qualifying medical expense.
Qualifying Medical Expenses
Employee, employee’s spouse and
Group Health Plan HRAs, IRCHRAs,
Account holder and account holder’s
Incurred by Which Individuals
dependents, and employee’s children under
and Excepted Benefit HRAs: Employee
spouse and dependents.o
the age of 27.o
(current and former), employee’s spouse
and dependents (including those of
deceased employees), and employee’s
children under the age of 27.o
QSEHRAs: Current employee, spouse
and dependents of the employee (including
Congressional Research Service
19

link to page 25 link to page 25 link to page 25 link to page 25 link to page 25 link to page 24 link to page 25 link to page 24 A Comparison of Tax-Advantaged Accounts for Health Care Expenses

Health Flexible Spending
Health Reimbursement

Arrangements (FSAs)
Arrangements (HRAs)
Health Savings Accounts (HSAs)
those of deceased employees), and the
employee’s children under the age of 27.o
Retiree-Only HRAs: Former employee,
former employee’s spouse and dependents
(including those of deceased employees),
and former employee’s children under the
age of 27.o
Tax Status of Nonmedical
Nonmedical withdrawals general y are not
All HRAs: Nonmedical withdrawals
Nonmedical withdrawals are permitted but
Withdrawals
permitted.
general y are not permitted.
must be counted as income and general y
are subject to a 20% penalty tax.p
Closing an Account
Length of Time Funds Are
General y, one year.
All HRAs: Employers have discretion and
Indefinitely.
Available
may specify a period of less than one year.
Carryover of Unused Funds
In general, limited amounts may be carried
All HRAs: Unused amounts general y may
Ful amount may be carried over
over, at employer’s discretion.q
be carried over indefinitely, although
indefinitely.
In light of the COVID-19 pandemic and
employers may limit the amount that can
recession, all unused balances may be
be carried over.
carried over, at employer’s discretion, from
QSEHRAs: Carried-over amounts count
FSAs that end in 2020 and 2021.r
toward the annual contribution limit.
Excepted Benefit HRAs: Carried-over
amounts do not count toward the annual
contribution limit.
Portability of Account
In general, any amounts in the account are
Group Health Plan HRAs, ICHRAs,
The account and account funds remain with
forfeited when an employee separates from
Excepted Benefit HRAs, and Retiree-
the individual if the individual changes
the employer, although extensions for
Only HRAs: Unless the employer has
employers or leaves the workforce.
those covered by COBRA sometimes
determined otherwise, amounts in the
apply.m
account are forfeited when an employee
In light of the COVID-19 pandemic and
separates from the employer, although
recession, individuals who stop participating extensions for those covered by COBRA
in an FSA (e.g., as a result of termination) in sometimes apply.m
2020 and 2021 may continue to access
QSEHRAs: Any amounts in the account
unused balances through the FSA plan year,
are forfeited when an employee separates
at employer’s discretion.r
from the employer.
Congressional Research Service
20

A Comparison of Tax-Advantaged Accounts for Health Care Expenses

Source: Congressional Research Service (CRS) analysis of IRC §§105, 106, 125, 223, and 9831(d) and other IRS sources (available upon request to congressional clients).
Notes: To facilitate easy reading, the term account is often used in this table to refer col ectively to both certain tax-advantaged accounts and certain tax-advantaged
accounts arrangements. COVID-19 = Coronavirus Disease 2019; C-CPI-U = Chained Consumer Price Index for Al Urban Consumers; COBRA = Consolidated Omnibus
Budget Reconciliation Act of 1985 (P.L. 99-272) continuation coverage; HDHP = high-deductible health plan; ICHRA = individual coverage health reimbursement
arrangement; IRA = individual retirement arrangement; IRC = Internal Revenue Code; IRS = Internal Revenue Service; MSA = medical savings account; and QSEHRA =
qualified smal employer health reimbursement arrangement.
a. Employers may exclude employees who have not completed 90 days of service with the employer; are younger than 25 years of age prior to the plan year; are part-
time or seasonal employees; are covered by a col ective bargaining agreement, if health benefits were the subject of good-faith bargaining; and are nonresident aliens
with no earned income from sources within the United States.
b. Disqualifying coverage general y is considered any health plan that is not an HDHP and that provides coverage for any benefit that is covered under the HDHP.
c. Group health plan HRAs also can be integrated with Medicare and TRICARE plans, if certain conditions are met.
d. ICHRAs also can be integrated with Medicare, if certain conditions are met.
e. Minimum essential coverage, as the term is defined at 26 U.S.C. §5000A(f). 26 U.S.C. §106(g). Most types of comprehensive coverage are considered minimum
essential coverage, including public coverage, such as coverage under programs sponsored by the federal government (e.g., Medicaid, Medicare), as wel as private
insurance (e.g., employer-sponsored insurance, individual insurance).
f.
The ability to cover telehealth services before the deductible is a temporary flexibility that was incorporated in response to the COVID-19 pandemic and
corresponding recession. It applies to HDHPs with plan years that begin on or before December 31, 2021.
g. In general, Archer MSAs can be thought of as an older, more-restrictive version of HSAs that are similarly paired with certain HDHPs. Since December 31, 2007,
individuals general y have not been able to open new Archer MSAs, except for limited instances. As a result, few Americans currently and actively contribute to
these types of accounts.
h. These amounts are prorated for part-year-eligible individuals.
i.
These amounts may be prorated for part-year-eligible individuals. Where applicable, these annual limits must be reduced by the amount of any contributions
individuals make to their Archer MSAs during the same year or by the amount of any direct contributions to an individual’s HSA from a traditional or Roth IRA.
j.
The contribution is zero for individuals entitled to Medicare benefits.
k. Long-term-care insurance is private insurance designed to protect against the risk associated with the potential cost of financing expensive long-term-care services
and supports.
l.
For QSEHRAs, reimbursements for pretax premiums for group health plan coverage sponsored by an eligible employee’s spouse’s employer must be counted as
income.
m. In 1985, Congress enacted legislation to provide some former employees temporary access to their former employers’ health insurance. Under Title X of the
Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA; P.L. 99-272), an employer with 20 or more employees must provide the option of continuing an
individual’s health coverage under the employer’s group health insurance plan if the individual experiences a qualifying event. Qualifying events include, for the
employee, termination or reduction in hours of employment (for reasons other than gross misconduct). Qualifying events includ e, for the employee’s spouses and
dependent children, the death of the covered employee, divorce or legal separation from the employee, the employee’s becoming eligible for Medicare, an d the end
of a child’s dependency under a parent’s health insurance policy. For more information on COBRA continuation coverage, see CRS Report R40142, Health Insurance
Continuation Coverage Under COBRA.
Congressional Research Service
21

A Comparison of Tax-Advantaged Accounts for Health Care Expenses

n. Short-term, limited-duration insurance (STLDI) is coverage general y sold in the individual market that must have a specified expiration date that is less than 12
months after the original effective date of the contract and that cannot last longer than 36 months, taking into account renewals or extensions. For more
information on STLDI, see STLDI section in CRS In Focus IF11359, Applicability of Federal Requirements to Selected Health Coverage Arrangements: An Overview.
o. In this context, the term dependent is as defined for tax purposes. A dependent is either (1) a qualifying child or (2) a qualifying relative. There are several tests to
determine whether an individual is a taxpayer’s qualifying child or relative. For more information, see Appendix A in CRS Report R44993, Child and Dependent Care
Tax Benefits: How They Work and Who Receives Them. Technical y, the individual must either be (1) the taxpayer’s dependent or (2) an individual whom the taxpayer
could have claimed as a dependent, except that (a) the individual has gross income that equals or exceeds the personal exemption amount ($4,300 in 2021,
according to the IRS); (b) the individual files a joint return; or (c) the individual (or his or her spouse, if filing jointly) could be claimed as a dependent on another
taxpayer’s return.
p. The penalty tax does not apply in cases of disability, death, or after an account holder attains the age of 65.
q. Balances remaining at current year’s end may be (1) forfeited to the employer; (2) carried over for 2½ months after current year’s end to reimburse qualifying
expenses for the current year; or (3) carried over to reimburse qualifying medical expenses for the following year, subject to a $550 limit in 2020 plan year funds.
The employer must choose one option that wil apply to al employees.
r. This temporary flexibility was provided in the Consolidated Appropriations Act, 2021 ( P.L. 116-260). For more information on al flexibilities provided by this act,
see IRS, “Additional Relief for Coronavirus Disease (COVID-19) Under §125 Cafeteria Plans,” Notice 2021-15, at https://www.irs.gov/pub/irs-drop/n-21-15.pdf.

Congressional Research Service
22

A Comparison of Tax-Advantaged Accounts for Health Care Expenses

Author Information

Ryan J. Rosso

Analyst in Health Care Financing

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan
shared staff to congressional committees and Members of Congress. It operates solely at the behest of and
under the direction of Congress. Information in a CRS Report should n ot be relied upon for purposes other
than public understanding of information that has been provided by CRS to Members of Congress in
connection with CRS’s institutional role. CRS Reports, as a work of the United States Government, are not
subject to copyright protection in the United States. Any CRS Report may be reproduced and distributed in
its entirety without permission from CRS. However, as a CRS Report may include copyrighted images or
material from a third party, you may need to obtain the permission of the copyright holder if you wish to
copy or otherwise use copyrighted material.

Congressional Research Service
R46782 · VERSION 1 · NEW
23