Fall is around the corner and so is health insurance open enrollment season. Right now, many companies and employers are evaluating the health care coverage options that they offer and what they will look like for the upcoming year. In many cases, traditional insurance coverage plans offered by employers are making room for tax advantaged health savings accounts. While these health savings accounts can offer tax benefits for employees and employers, it is important to understand how they operate before making a switch.
Health Savings Account (HSA)
A HSA operates as a tax-exempt trust or custodial account to help pay for certain medical expenses. HSA accounts can be set up at any time with a qualified trustee, such as a bank, insurance company, or anyone approved by the IRS to operate as a trustee on such accounts
The individual holding the HSA or any other eligible person, including an employer or family member, may contribute funds to the HSA. The contribution limit for an individual is determined by the type of coverage the individual has, their age, and the date that they become eligible for the HSA. In 2024, the contribution limit for individuals was $4,150.00 and $8,300.00 for families. Contributions made by the holder or family members are deductible expenses. Additionally, employer contributions are not included in income and are therefore not taxed for the holder of the HSA.
There are a variety of benefits associated with HSAs. Below are some of the common ones:
- You can claim a tax deduction for contributions you, or someone other than your employer, makes to your HSA.
- Contributions made to your HSA by your employer do not qualify as gross income and can be excluded from income tax assessments.
- Contributions made to the HSA stay in your account until you use them.
- The interest or earnings on the assets in the account are tax free.
- Distributions from HSA accounts are tax free if it is for a qualified medical expense.
- HSAs stay with the holder, meaning that you can continue to contribute to and take distributions from the account if you change employers or leave the workforce.
It is important to note that there are certain criteria for qualifying for an HSA. One criteria is that you are covered under a high-deductible health plan (HDHP). High-deductible health plans have a higher annual deductible than typical plans and a minimum and maximum limit that you must pay for out-of-pocket medical expenses. Another important criteria for HSA accounts are that you generally cannot have any other health coverage plans. While you can have additional insurance that provides benefits for workers compensation, a specific disease or illness, fixed period of hospitalization, accidents, disabilities, dental care, vision care, and long-term care, you cannot have other traditional health insurance coverage or other health savings plan accounts like an FSA or HRA.
Medical Savings Account (Archer MSA and Medicare Advantage MSA)
Archer MSAs were created to help small business owners and employees cover medical costs. Like an HSA, they are tax-exempt trust or custodial accounts and can be set up at qualifying financial institutions. A Medicare Advantage MSA is a type of Archer MSA designated by Medicare to be used for paying qualified medical expenses for account holders who are eligible for Medicare.
Some common benefits of MSA accounts include:
- Contributions are tax deductible.
- The interest and earnings on the assets in a MSA account are tax free.
- Distributions for qualified medical expenses are tax free.
- Contributions remain in MSAs from year to year, and stay in the account until you use them.
- MSAs stay with the holder, so you can take distributions from the account if you change employers or leave the workforce. However, you may not be able make contributions unless you move to another small employer and continue to meet reliability requirements.
To qualify for an MSA, you have to be either an employee (or spouse of an employee) of a small employer that maintains a high-deductible health plan for you, or a self-employed person (or spouse of a self-employed person) who maintains a high-deductible health plan. A small employer is considered one that has an average of less than 50 employees during the last 2 calendar years. Additionally, you must have no other health coverage, aside from supplementary plans such as dental, vision, or disability insurance. To qualify for a Medicare Advantage MSA, you must be enrolled in Medicare and have a high-deductible health plan that meets Medicare guidelines.
There are also limits for MSA contributions that individuals and employers should be aware of. The annual deductible limit allows for you or your employer to contribute up to 75% of the annual deductible for the MSA. There is also an income limit, which means that you cannot contribute more than you earned for the year from the employer through whom you have a high-deductible health plan. If you are self-employed, you cannot contribute more than your net self-employment income (income-expenses).
Health Flexible Spending Arrangements (FSA)
FSAs are accounts that are typically set up through employers as a way to reimburse employees for medical expenses.
FSA contributions are made through voluntary salary reduction arrangements with an employer. In other words, an amount or percentage of your paycheck is deducted every pay period to fund the FSA. This deduction amount is set by you at the start of every year. There are yearly contribution limits to FSAs, for instance, in 2024, the contribution limits were $3,200.00. While employees are typically the ones funding their own FSAs, employers can also contribute to FSA accounts and may have programs in place for matching contributions. It is important to note that, generally, the funds contributed to an FSA will not roll over year to year and any excess contributions left in the account at the end of the year are forfeited. When figuring out paycheck withholdings, it should be based on the amount of qualified medical expenses you anticipate having before the end of the year.
Unlike HSAs or MSAs, there are no reporting requirements for FSAs on an individual’s income tax return
Benefits of an FSA include:
- Contributions made by your employer to your FSA are excluded from your gross income.
- No employment or federal income taxes are deducted from the contributions.
- Reimbursements for qualified medical expenses are tax free.
- You can use an FSA to pay for qualified medical expenses even if funds have not been credited to the arrangement.
Qualifications for an FSA account are set by employers rather than the IRS, as they are employer established benefit plans. FSA accounts may be offered with other employer provided benefits, and employers have the flexibility to offer various combinations of benefits when designing their plan options.
Distribution from FSA accounts are for qualified medical expenses. These include medical expenses outlined in IRS Publication 502. They also include over the counter medications, such as cold and flu medication, and menstrual care products. These do not include amounts paid for other health insurance premiums, amounts paid for long-term care coverage, or amounts that are covered under another health plan.
Health Reimbursement Arrangements (HRAs)
HRAs are another type of employer account made to help employees pay for medical expenses. These accounts allow for tax free reimbursement of qualified medical expenses funded by an employer.
Unlike FSAs, HRAs are fully funded by the employer. An employee cannot make any contributions to the account. However, there is no limit on the amount of contributions your employer can make to an HRA. An employer is not required to make any other distributions or refund any remaining balance to you, since it is an employer funded account.
Like an FSA, there are no reporting requirements for HRAs on an individual’s income tax return.
Some of the benefits of an HRA include:
- Contributions made by your employer are excluded from your gross income.
- Reimbursements for qualified medical expenses are tax free.
- Any unused amounts in the HRA can be carried forwards for reimbursements in later years – depending on employer
The qualifications for an HRA are set by the employers. HRAs may be offered along with other employer provided health benefits. Self-employed individuals do not qualify for HRAs.
Distributions for HRAs are for qualified medical expenses. Like FSA’s, this includes medical expenses outlined in IRS Publication 502, over the counter medication, and menstrual care products. However, unlike most other tax advantage health savings plans, HRAs can also be used to cover amounts paid for health insurance premiums, amount paid for long-term care coverage, and medical expenses not covered under another plan.
HSAs, MSAs, FSA, and HRAs are all tax-advantaged plans to consider during open enrollment season, along with other employer offered and independent health care coverage options. Choosing the right health care coverage plan for you and your family is an important decision, so start investigating your options now.
Internal Revenue Service. (2025, Jan 13). Publication 969: Health Savings Accounts and Other Tax-Favored Health Plans. https://www.irs.gov/pub/irs-pdf/p969.pdf
