Various programs are designed to give individuals tax advantages to offset health care costs. This section provides general definitions of other tax-favored arrangements to help save for medical expenses and their tax consequences.
Tax-Favored Arrangements Saving for Medical Expenses
These definitions will help you distinguish the differences in these programs and help with your overall understanding of tax-favored arrangements. While these programs may have features similar to an HSA, it is important to know they are different.
Types of tax-favored arrangements are:
- Archer Medical Savings Accounts
- Medicare Advantage MSA
- Health Reimbursement Arrangements
- Flexible Spending Arrangements
Archer Medical Savings Accounts (MSA)
The Archer MSA represents the first generation of HSAs and are very common among employers. MSA contributions may be received from either an eligible individual or his or her employer, but not in the same tax year. Contributions by the individual are taken as an adjustment to income and are deductible whether or not the individual itemizes deductions. Employer contributions are not included in taxable income. As long as distributions from an MSA are used to pay qualified medical expenses, they are not taxed. But MSA eligibility is restricted to employees of small employers and the self-employed, which rules out participation for many taxpayers.
Medicare Advantage MSA
A Medicare Advantage MSA is an Archer MSA designated by Medicare to be used solely to pay the qualified expenses of the account holder who is enrolled in Medicare. Contributions can only be made by Medicare. The contributions are not included in the individual’s income. Distributions from a Medicare Advantage MSA that are used to pay qualified medical expenses are not taxed.
Health Reimbursement Arrangements (HRA)
An HRA must receive contributions from the employer only. Employees may not contribute. Contributions are not includible in income. Reimbursements from an HRA that are used to pay qualified medical expenses are not taxed.
Flexible Spending Arrangements (FSA)
A health Flexible Spending Arrangement (FSA) allows an employee to be reimbursed for medical expenses. An FSA is usually funded through a voluntary salary reduction agreement with the employer. No employment tax or federal income tax is deducted from an employee’s contribution. The employer may also contribute. The FSA is not a health plan but only a means of reimbursing the FSA participant for qualified medical expenses. Do not confuse FSA with HSA; FSA activity is not reported on an individual tax return.