Four types of tax-advantaged accounts can be used to pay for qualifying unreimbursed medical expenses: Health Care Flexible Spending Accounts (FSAs), Health Reimbursement Accounts (HRAs), Health Savings Accounts (HSAs), and Medical Savings Accounts (MSAs). Qualifying medical expenses typically include deductibles, copayments, and goods and/or services not covered by insurance. (More details are given below.) This report describes current law surrounding these accounts and provides a side-by-side comparison of their key features. The report also provides an indication of the relative prevalence of the accounts. There are two broad categories of tax provisions that can lower an individual's tax liability because of qualifying medical expenses. First, qualifying medical expenses can be a tax deduction. Tax filers can itemize medical expenses incurred by him- or herself, spouse, and dependents if these expenses are over the legislative minimum. Second, tax filers can use one (or occasionally more) of the tax-advantaged accounts discussed in this report. Although the accounts differ in many ways, each account contains contributed income that the account holder uses to pay for qualifying medical expenses. Each account provides tax savings to the account holder because the money contributed to the account is not considered a part of the individual's adjusted gross income. Therefore, no taxes are paid on this income, and for those arrangements where the income is placed in an account, no taxes are paid on interest earned on the income in the account. Moreover, the tax filer does not need to itemize deductions to receive tax savings from the account. Itemized deductions cannot be funded through a tax-advantaged account, and expenses funded through an account cannot be declared as itemized deductions. In other words, "double counting" is prohibited. In general, qualifying medical expenses are defined in the Internal Revenue Code (IRC) at Section 213(d) 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, devices, and prescription drugs are also qualifying expenses. To qualify, the medical care must be primarily used to alleviate or prevent a physical or mental defect or illness. Care used to benefit general health (e.g., exercise equipment, vitamins, and vacations) is not a qualifying medical expense. Some examples of qualifying medical expenses are breast reconstruction surgery, disabled dependent care expenses, fertility enhancement (as specified), hospital services, lifetime care—advance payments, long-term care, psychiatric care, special education, and transplants. Some examples of expenses that are not qualifying medical expenses are cosmetic surgery, funeral expenses, health club dues, and household help. Over-the-counter medications are not qualified medical expenses unless prescribed by a physician. Finally, insulin is always a qualifying medical expense, whether or not it is purchased with a prescription. Table 1 provides a more detailed side-by-side comparison of the laws and regulations governing each account. In each case, the reimbursement is for qualifying medical and dental expenses not covered by insurance. The beneficiaries for all accounts are the employee, spouse, and dependents. FSAs are employer-established arrangements that reimburse employees for qualifying expenses. FSAs are usually funded through salary reduction agreements in compliance with Section 125(i) of the IRC, under which employees receive lower monetary wages in exchange for equivalent contributions to their flexible spending accounts. For example, employees may forgo $100 a month in their 2013 paychecks, which will result in a $1,200 annual contribution to their FSA. The entire annual amount of an FSA must be made available to employees at the beginning of the year. Suppose the above employee had surgery during February, and incurred over $1,500 in unreimbursed qualifying medical expenses. The employee could use the full $1,200 annual FSA contribution to help pay for these expenses, even though he or she may have contributed only $200 into the account by that point in the year. Beginning in 2013, contributions are limited to $2,500 per employee. If each member of a married couple is eligible to enroll in an FSA, then each member can contribute up to $2,500. The FSA limits are adjusted for inflation yearly using the Consumer Price Index for All-Urban Consumers (CPI-U). Prior to 2013, the IRS did not set a maximum annual contribution. Plans typically had a dollar or percentage maximum for elective contributions from salary reductions. Within these limits, employees choose how much to put into their accounts, and this amount can vary from year to year. Employers can choose one of three mutually exclusive policies for the treatment of contributions in any given year that were not used to reimburse qualifying medical treatment in that year: employees forfeit unused balances at the end of the year, employees have a grace period for additional claims of up to 2½ months after the end of the year (i.e., so medical expenses incurred by March 15, 2013, could be reimbursed from the FSA from the 2012 contribution), or employees have a carry-over period where they can transfer up to $500 in unused contributions into an FSA for the next plan year; the employer may specify a lower carry-over amount. This third option is newly available for plan-years beginning in 2013 or later. While compensation received as wages is subject to income taxes, as well as Social Security and Medicare taxes, compensation received as FSA contributions is not subject to these taxes. For this reason, employees who anticipate having health expenses not covered by insurance may prefer FSAs over monetary wages. As mentioned above, many FSAs are funded by salary reduction agreements. These FSAs are governed by Section 125 of the IRC, which exempts contributions from taxes even though the employees have the choice to receive taxable wages. However, if FSAs are funded by nonelective employer contributions then their tax treatment is not governed by the cafeteria plan provisions in Section 125; in this situation, the employee does not have a choice between receiving cash and a normally nontaxable benefit. Instead, the benefits are nontaxable since they are directly excludable under some other provisions of the Code. For example, nonelective employer-funded FSAs for health care are tax-exempt under Sections 105 and 106. Most rules regarding FSAs are not spelled out in the IRC; they were initially included in proposed regulations issued by the Internal Revenue Service (IRS) in 1984 and 1989, and have been subsequently modified. HRAs are employer-established accounts used to reimburse employees and in some instances former employees for qualifying medical expenses. Health reimbursement accounts are sometimes termed health reimbursement arrangements . As is the case with FSAs, contributions are not subject to either income or employment taxes. However, contributions cannot be made through the employees' salary reduction agreements; only employers may contribute. HRAs differ from FSAs in several important respects. Employers may restrict the types of medical and health services that are eligible for reimbursement from the list of qualified medical expenses. For example, an employer may choose not to reimburse expenses associated with acupuncture treatments even though the IRS considers acupuncture a qualifying medical expense. Employers need not actually fund HRAs until employees draw upon them, and the total reimbursement amount for a coverage period need not be available at all times during the period. In addition, the coverage period for the reimbursement amount may be less than a year, and HRAs reimbursements can be limited to amounts previously contributed. Unused HRA balances may be carried over indefinitely, although employers may limit the aggregate carryovers and the carryovers must be used for qualified medical expenses. Finally, employees who change jobs or retire may take the funds in their HRA with them, if their employer has set up an account which allows for this. The provisions in this paragraph, however, are optional (not required) for the employer. HRAs are governed by Section 105 of the IRC, which allows health plan benefits used for medical care to be exempt from taxes, and Section 106 of the IRC, which allows employer contributions to those plans to be tax-exempt. Rules regarding HRAs were spelled out by the IRS in 2002. HSAs are tax-exempt accounts that are used to pay for qualifying medical expenses. Unlike FSAs and HRAs, they are established by individuals with an insurance plan meeting certain criteria. In particular, the individual must have a high deductible health (insurance) plan (HDHP). For those individuals with employer-sponsored insurance, the employer must offer an HSA-qualified plan for the employee to be eligible for an HSA. An individual may also purchase an HSA-qualified insurance plan through the individual insurance market. To be HSA-qualified, the HDHP must meet certain requirements. In 2013, an HDHP must have a deductible of at least $1,250 for self-only coverage and $2,500 for family coverage. The deductible is indexed annually for inflation using the CPI-U. There are other criteria including that the plan holder have no other major medical health insurance policy. In 2013, HSA contributions are limited to $3,250 for self-only coverage and $6,450 for family coverage. These limits are indexed annually by the CPI-U. An additional annual contribution of $1,000 is allowed for people who were age 55 and older at the end of their last tax year and not enrolled in Medicare as of the current month; this contribution is not indexed for inflation. HSA holders cannot contribute to their account in any month they do not have qualifying HDHPs as of the first day of the month. On the other hand, HSA holders can draw funds from their accounts even if they are not permitted to contribute. HSAs can carry significant tax advantages. Contributions made by employers are exempt from income and employment taxes.