Tax-Favored Plans

Health Savings Account (HSA)

A health savings account (HSA) is a tax-exempt account that you set up with a financial institution such as a bank, insurance company or other entity approved by the IRS, to pay or reimburse you for certain medical expenses. Qualified medical expenses include medical, dental, vision, prescription and non-prescription (over-the-counter) medicines.

In general, to qualify for an HSA, you must:

have a high deductible health plan;
have no other health coverage;
not be enrolled in Medicare; and,
not be claimed on anyone else’s tax return.

The benefits of a HSA may include:

tax deduction for your contributions to your HSA, even if you do not itemize deductions;
contributions by your employer may be excluded from your gross income;
interest earnings on the account are tax free;
distributions may be tax free if you pay qualified medical expenses;
an HAS stays with you if you change jobs or stop working; and
you may carry over unused amounts at the end of the year

Employers may contribute to their employees’ HSAs, only if they contribute to all participating employees’ HSAs. The employer may deduct the contributions on the “Employee benefit programs” line of their business income tax return. Amounts that an employer contributes to employees’ HSAs are generally not subject to employment taxes.

Medical Savings Account (MSA)

A medical savings account (MSA) is a tax-exempt account that you set up with a financial institution, such as a bank or insurance company, in which you save money solely for future medical expenses.

MSAs offer the same benefits as HSAs. To qualify, you must be an employee of a small employer, generally 50 or fewer employees or a growing employer, that established MSAs when the employers was a small employers but now has more than 50 employees.

To be eligible for a MSA, you must:

have a high deductible health plan; and
have a maximum limit on the annual out-of-pocket medical expenses that you must pay for covered expenses.

Employers may contribute to a MSA only if the employee does not contribute to their MSA. You or your employer may contribute up to 75% of your annual deductible of your high deductible health plan or 65% if you have a self-only plan. You may not contribute more than you earned for the year.

Medicare Advantage MSA

You may use a Medicare Advantage MSA solely to pay the qualified medical expenses for people enrolled in Medicare with a high-deductible health plan.

Flexible Spending Arrangement (FSA)

Flexible spending arrangements (FSAs) are accounts that employers establish for their employees to reimburse them for certain medical expenses. An employee and employer may contribute to the account. You are not required to have a high deductible health plan.

The benefits of a FSA may include:

contributions by your employer can be excluded from your gross income;
no employment or federal income taxes are deducted from contributions;
withdrawals may be tax free if you pay qualified medical expenses; and
although there is no limit on the amount that you or your employer can contribute, unspent funds are forfeited at the end of plan year and you must elect an amount to contribute to the FSA each year.

You or your employer may issue debit cards, stored value cards or credit cards to reimburse participants in a FSA.

Health Reimbursement Arrangement (HRA)

Health reimbursement arrangements (HRAs) are accounts that are funded solely by an employer. Employees are reimbursed tax-free for qualified medical expenses through debit cards, stored value cards, or credit cards provided by their employers.

The benefits of an HRA may include:

contributions by your employer can be excluded from your gross income;
reimbursements may be tax free for qualified medical expenses;
any unused amounts can be carried forward in later years; and
you do not have to be covered by any other health plan to participate.