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HSAs, FSAs, and Other Tax-Favored Accounts

Various programs are designed to give individuals tax advantages to offset health care costs. This section explains the following programs.

  • Health savings accounts (HSAs);
  • Flexible spending arrangements (FSAs);
  • Health reimbursement arrangements (HRAs); and
  • Medical savings accounts (Archer MSAs and Medicare Advantage MSAs).

HSA—Health Savings Account

A Health Savings Account is an alternative to a typical health insurance plan; it is a savings product that offers a different way for consumers to pay for their health care. HSAs enable an employee to pay for current health expenses and save for future qualified medical and retiree health expenses on a tax-free basis.  An individual must be covered by a High Deductible Health Plan (HDHP) to be able to take advantage of HSAs.

Used in conjunction with a High Deductible Health Plan (HDHP), an HSA may receive contributions from an eligible individual or any other person, including an employer or a family member, on behalf of an eligible individual. Contributions, other than employer contributions, are deductible on the eligible individual's return whether or not the individual itemizes deductions. Employer contributions are not included in income. Distributions from an HSA that are used to pay qualified medical expenses are not taxed.

FSA—Flexible Spending Arrangement

A health flexible spending arrangement (FSA) allows employees to be reimbursed for medical expenses. FSAs are usually funded through voluntary salary reduction agreements with the employer. No employment or federal income taxes are deducted from the employee contribution. The employer may also contribute. Reimbursements from an FSA that are used to pay qualified medical expenses are not taxed.

HRA—Health Reimbursement Account

A health reimbursement arrangement (HRA) must be funded solely by an employer. The contribution cannot be paid through a voluntary salary reduction agreement on the part of an employee. Employees are reimbursed tax free for qualified medical expenses up to a maximum dollar amount for a coverage period. An HRA may be offered with other health plans, including FSAs. Reimbursements from an HRA that are used to pay qualified medical expenses are not taxed.

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