Health Savings and Reimbursement Accounts

Health Savings Accounts

An HSA can receive contributions from an eligible individual, employer, or another person.

• Contributions from the individual, employer, and other people share the individual's applicable contribution limit. Add all contributions before checking the remaining room.

• Ordinary new contributions must be money, not stock or other property.

• Eligibility depends on federal requirements, including the individual's health coverage and other coverage.

• The rules can change, so verify current Internal Revenue Service (IRS) guidance before stating a specific eligibility result or contribution limit.

• Generally, contribution eligibility requires HSA-compatible coverage, no disqualifying other coverage, no Medicare enrollment, and not being claimable as another taxpayer's dependent. HSA-compatible coverage meets federal account-eligibility rules, ordinarily including a minimum deductible and a ceiling on covered annual out-of-pocket costs.

• From 2026, qualifying Bronze and Catastrophic plans available as individual coverage through an Exchange, the health-insurance Marketplace, receive special HSA-compatible treatment. A Bronze group plan through the Small Business Health Options Program (SHOP) does not receive that treatment merely because it is Bronze; it can still qualify under the ordinary requirements.

• Spouses cannot jointly own an HSA. If both are eligible and each wants an account, each opens a separate HSA, even when they share family medical coverage.

HSA balances generally remain with the account holder when employment changes. Unused amounts generally carry forward from year to year rather than following the health FSA's general use-it-or-lose-it rule. The balance remains subject to HSA distribution rules.

• Eligible contributions may qualify for a tax deduction or exclusion from income.
• Interest and other earnings inside the account are not currently taxed.
• Withdrawals used for qualified medical expenses may be tax-free under current rules.
• A nonqualified distribution can be taxable and may face an additional tax.

Exam Tip: Gotchas

• Employer funding does not make an HSA employer-owned.

Flexible Spending Arrangements

A health FSA is established through an employer plan.

• Employees may elect salary reductions, amounts withheld from pay and put into the plan. An employer may also contribute.
• Employee salary reductions and permitted employer contributions generally avoid federal income and employment taxes. Reimbursements may be tax-free when expense-eligibility and documentation requirements are met.
• The full elected annual reimbursement is available during the coverage period even before payroll deductions have accumulated.
• An employer's separate contribution does not replace the employee's stated salary-reduction election. To find the deduction per paycheck, divide that election over the number of paychecks specified by the plan.

Example: An employee elects $2,400 from salary over 24 paychecks. The employer contributes another $600:

1. Use the employee's election for payroll deductions: $2,400 ÷ 24 = $100 per paycheck.
2. Keep the employer's $600 separate; it does not replace or increase the stated $2,400 salary election.

Reimbursement and unused-fund rules follow the employer's plan:

• The account reimburses eligible expenses under the plan.
• The expense must already have been incurred during the coverage period and cannot also have been paid or reimbursed by another health plan. The plan cannot reimburse projected future expenses in advance.
• A health FSA cannot reimburse health-insurance premiums or long-term-care expenses.
• FSA rules can include a use-it-or-lose-it approach. A plan may permit a limited carryover or a grace period, but not both; neither feature is automatic.
• Base an annual election on expected eligible expenses that insurance or another plan will not reimburse. Including nonqualified expenses or costs paid by insurance can leave money unused.

A plan can permit a claim to be filed later when the eligible expense was already incurred during coverage or an allowed grace period. The filing deadline does not extend the time to incur expenses.

Example: After eligible claims are paid, $700 remains. The plan permits a $500 carryover and has no grace period:

1. Carry forward the permitted $500.
2. Calculate the amount forfeited: $700 − $500 = $200.

The $500 is this example's plan limit, not a universal annual limit.

An FSA is linked to the employer plan and does not work exactly like an individually owned HSA.

• Participation in certain FSAs can affect HSA eligibility, so account coordination matters.
• A limited-purpose health FSA that reimburses only dental and vision expenses does not itself prevent new HSA contributions with qualifying medical coverage. A general-purpose health FSA that reimburses medical expenses before the minimum deductible required for HSA contributions generally does.

Health Reimbursement Arrangements

An HRA is funded solely by the employer.

• The employer reimburses eligible expenses according to the plan.
• When the plan permits, eligible expenses can include health-insurance premiums and long-term-care coverage.
• Employer contributions can be excluded from the employee's income, and qualified medical-expense reimbursements can be tax-free.
• Employees do not make salary-reduction contributions to an HRA and generally do not own a portable account balance when employment ends.
• To calculate permitted HRA funding, exclude both employee payroll deductions and employee personal deposits.
• Trace where separate payroll deductions go. Deductions used only for medical insurance premiums do not, by themselves, fund the HRA. Check for indirect funding, such as a larger HRA credit tied to a larger salary deduction.
• A plan may allow unused reimbursement credit to carry forward for future qualified expenses. The employer cannot refund the balance as cash, and carryforward inside the plan does not create individual ownership.

How Do Ownership and Funding Compare?

Example: Changing jobs

An employee leaves a job with money in an HSA and access to an employer FSA and HRA. The HSA generally remains the employee's account. The FSA and HRA follow the employer plan's terms, including any continuation or carryover rights. Check those terms before telling the employee what can still be used.

• An expense's date and the claim's submission date are separate. A plan can allow time after coverage ends to submit a claim for an expense incurred while coverage was in force.
• That extra filing time does not, by itself, extend coverage to new expenses incurred after coverage ends.

Exam Tip: Gotchas

• Do not assume an FSA or HRA balance follows a worker to a new employer.

What Should You Check on Exam Day?

• Who owns and funds the HSA, FSA, or HRA?
• Which current IRS eligibility and tax rules apply?