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Friday, November 22, 2013

Tax-Advantaged Accounts for Health Care Expenses: Side-by-Side Comparison, 2013

Carol Rapaport
Analyst in Health Care Financing

Four types of tax-advantaged accounts can be used to pay for unreimbursed qualifying medical expenses: health care flexible spending accounts (FSAs), health reimbursement accounts (HRAs), health savings accounts (HSAs), and medical savings accounts (MSAs). Qualifying unreimbursed medical expenses are defined in the Internal Revenue Code (IRC) and typically include deductibles, copayments, and goods and/or services not covered by insurance. The goods and/or services can include medical services rendered by physicians, surgeons, dentists, and other medical practitioners. The costs of equipment, supplies, diagnostic devices, and prescription drugs are also qualifying medical expenses.

Although these four tax-advantaged health accounts share some common features, they also differ in important respects. This report provides brief summaries of the tax-exempt accounts and compares them with respect to eligibility, contribution limits, use of funds, and other characteristics for tax year 2013. A basic discussion of the four accounts is followed by a sideby- side comparison of their key features. The accounts can be summarized as follows, where all accounts reimburse qualifying medical and dental expenses not covered by insurance.

• FSAs are employer-established accounts that reimburse employees for qualifying expenses. They are usually funded through salary reduction agreements under which employees receive lower monetary wages in exchange for equivalent contributions to their FSAs.

• HRAs are employer-established arrangements that reimburse employees for qualifying expenses. Contributions cannot be made through the employees’ salary reduction agreements; only employers may contribute. Health reimbursement accounts and health reimbursement arrangements are synonyms.

• HSAs are savings accounts that the account holders use to pay for qualifying expenses. They are established by individuals who must hold high-deductible health plans (HDHPs) in order to establish or contribute to the HSA. Contributions to the accounts can be made by any individual or firm.

• MSAs are accounts that the account holders use to pay for qualifying expenses. They were established by individuals who held high-deductible health plans (HDHPs) in order to establish or contribute to the MSA. Individuals generally cannot open MSAs after December 31, 2007, but those who had accounts by this date may maintain them. MSA eligibility was limited to people who were selfemployed or employed by an employer with fewer than 50 employees. Contributions may be made by the employer or account holder, but not both in the same year.

The report concludes with a brief discussion of the usage in these four accounts. Comparing usage is difficult because no single data source contains comparable information on all four accounts and the years of data availability differ across data source. In broad terms, 40% of all civilian workers in 2012 had access to a health care flexible spending account. Of those private firms offering health benefits in 2012, 26% offered an HSA-qualified HDHP.

Date of Report: November 8, 2013
Number of Pages: 18
Order Number: RS21573
Price: $29.95

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