Tax-Advantaged Accounts for Health Care Expenses: Side-by-Side Comparison Page: 4 of 11
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Tax-Advantaged Accounts for Health Care Expenses: Side-by-Side Comparison
Introduction
Four types of tax-advantaged accounts can be used to pay for unreimbursed medical expenses:
health care Flexible Spending Accounts (FSAs), Health Reimbursement Accounts (HRAs),
Health Savings Accounts (HSAs), and Medical Savings Accounts (MSAs).' Unreimbursed
medical expenses typically include deductibles, copayments, and goods and/or services not
covered by insurance.2 The first part of this report describes the current law surrounding these
accounts and provides a side-by-side comparison of their key features. The second section details
changes to the accounts effective over the next two years that were enacted by the Patient
Protection and Affordable Care Act (P.L. 111-148 as amended). The third section investigates the
participation rates in each account type. The report will be updated when relevant statutory or
regulatory changes occur, when new data become available, and as Congress considers issues
associated with these accounts.
Current Law
The text in this section provides summaries of each account as of June 2010. Although the
accounts differ in many ways, they each provide tax savings to the account holders. Table 1
provides a more detailed side-by-side comparison of the laws and regulations governing each
account.
Flexible Spending Accounts
FSAs are employer-established arrangements that reimburse employees for medical and dental
expenses not covered by insurance or otherwise reimbursable.3 They are usually funded through
salary reduction agreements under which employees receive lower monetary wages in exchange
for equivalent contributions to their flexible spending accounts. For example, employees may
forgo $100 a month in their 2010 paychecks in exchange for a $1,200 annual contribution to their
FSA. Employees choose how much to put into their accounts, and this amount can vary from year
to year. Employees forfeit unused balances at the end of the year unless the employer offers a
grace period for additional claims of up to 2 months after the end of the year (e.g., so medical
expenses incurred by March 15, 2011, could be reimbursed from the FSA for 2010). The entire
annual amount of an FSA must be made available to employees at the beginning of the year.
While compensation received as wages is subject to income taxes, as well as Social Security and
Medicare taxes, compensation received as FSA contributions is not subject to these taxes. (Social
Security and Medicare together are known as employment taxes.) For this reason, employees who
anticipate having health expenses not covered by insurance may prefer FSAs over monetary
wages.
1 For additional general information, see Internal Revenue Service publication 969, Health Savings Accounts and Other
Tax-Favored Health Plans, available at http://www.irs.gov/pub/irs-pdf/p969.pdf.
2 These accounts may not be used to pay for health insurance premiums.
s For additional information on FSAs, see CRS Report RL32656, Health Care Flexible Spending Accounts, by
Janemarie Mulvey.Congressional Research Service
1
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Rapaport, Carol. Tax-Advantaged Accounts for Health Care Expenses: Side-by-Side Comparison, report, June 18, 2010; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metadc809735/m1/4/: accessed May 8, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.