Internal Revenue Service United States Department of the Treasury
Level Basic Advanced Military International

Health Savings Accounts (HSA)

Types of Tax-Favored Arrangements

Tax-Favored Arrangements (continued)

Archer Medical Savings Accounts (MSA)

The Archer MSA represents the first generation of HSAs. 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 and are not deductible by the individual. 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.

Caution

These topics are out of scope and the information is provided for your awareness only. Explain to taxpayers with an Archer Medical Savings Account, Medicare Advantage MSA, or a Health Reimbursement Arrangement that these topics are out of scope for the VITA/TCE programs and refer them to a professional tax preparer.

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 withholding 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.