Health, Medical, and Flexible Spending Accounts
There are several programs based on tax breaks that are designed to help you pay for you and your family's medical expenses. The IRS calls them tax-favored health plans. Whether or not to report the information from any of these accounts or how to report it on your tax return can be confusing. The easiest and most accurate way to report this information is to start a free tax return on eFile.com. Based on your answers to several questions, we will prepare the forms you will need to report your HSA or any other tax-favored health plan correctly on your tax return.
For more detail about these tax-favored health plans such as a Health Savings Account, a Medical Savings Account, a Flexible Spending Arrangement, and/or a Health Reimbursement Arrangement, see below.
Health Savings Account (HSA)
A Health Savings Account (HSA) is a tax-exempt account used to pay or reimburse you and your family's medical expenses if you are covered by a high-deductible health insurance plan. You or anyone else can contribute money to your HSA. You can take a tax deduction for money contributed to your HSA by anyone except your employer. The money you take out of the account is tax-free if you use it for qualified medical expenses (see a list of qualified medical expenses).
You can set up a HSA through your employer, bank, insurance company, or another approved trustee. Health Savings Accounts are portable, so you can keep the account even if you change employers. The money in an HSA remains in the account until you spend it.
The requirements to qualify for an HSA are:
- You must be covered by a high-deductible health plan (HDHP) on the first day of the month.
- You cannot have any other general health coverage except a high-deductible health plan (there are exceptions for specific coverage, such as for vision, dental, disability, or long-term care insurance).
- You may not be enrolled in Medicare.
- You must not be claimed as a dependent on someone's 2019 tax return.
Contribution Limit for a Health Savings Account
For 2019 returns, the contribution limit for Health Savings Accounts is $3,500 for individuals and $7,000 for families (the amount for 2020 returns is $3,550 for individuals and $7,100 for families), plus an additional $1,000 if you are 55 or older at the end of the year. You generally cannot make contributions to an HSA if you are covered by a Flexible Spending Account or a Health Reimbursement Account.
Reporting HSA Contributions on Your Tax Return
If your employer made the contributions and they are listed on your Form W-2 or your contributions were made pre-tax, then you should not report them on Form 8889. However, if you made the HSA contributions post-tax you should report them on Form 8889. The same applies for the HSA employer contribution.
Your gross (total) distributions from an HSA are reported to you on Form 1099-SA. When you file your tax return, you are required to report HSA contributions and HSA distributions on Form 8889, attached to Form 1040. When you prepare your return on eFile.com, we will select the proper form(s) for you and help you fill them out correctly.
Medical Savings Account (Archer MSA)
An Archer Medical Savings Account (MSA) helps those employees of small businesses and self-employed people who are covered by a high-deductible health plan to pay the health care costs of themselves, their spouses, and their dependents. If you are employed, either you or your employer may contribute to your Archer MSA in any given year, but not both. If you are self-employed, only you can make contributions to your MSA.
You can set up an Archer MSA through your employer, a bank, an insurance company, or another financial institution. Medical Savings Accounts are portable, so you can keep the account even if you change employers, and the funds in an MSA remain in the account until you spend them.
You qualify for an Archer Medical Savings Account if all of the following are true:
- You are employed by a small employer (with an average of 50 or fewer employees over the last 2 years) at the time you start the MSA, or you are self-employed.
- You are covered by a high-deductible health plan (HDHP).
- You do not have any other general health care coverage except a high-deductible health plan (there are exceptions for specific coverage, such as for vision, dental, disability, etc.).
If you are eligible to be covered by Medicare, then you cannot enroll in an Archer MSA, but you can enroll in a Medicare Advantage MSA. This is like an Archer MSA, but you can only use the funds from a Medicare Advantage MSA to pay your own qualified medical expenses.
If you make contributions to your MSA, you can deduct the contributions on your tax return even if you don't itemize deductions, unless you are eligible to be claimed as someone else's dependent for the year. Distributions from an MSA are tax-free if the money is spent on qualified medical expenses--such as expenses not covered by your health plan because you have not yet met the high deductible (see a list of qualified medical expenses).
The maximum annual contribution to an MSA is 75% of your family health plan's annual deductible amount, or 65% of the deductible if you have a self-only plan. If you were not covered for the whole year by a high-deductible health plan, the maximum allowable contribution to your MSA is reduced by 1/12 per month in which you were not covered.
You may be able to carry forward excess contributions to an MSA and deduct them in a future year. Generally, you can also roll over funds from an MSA to a Health Savings Account tax-free. There are no HSA contribution limits for rollovers, but you can only make one rollover contribution per 1-year period.
Your total (gross) Archer or Medicare Advantage MSA distributions for the year will be reported to you on Form 1099-SA. When you file your tax return, you must report all distributions from your HSA--and contributions to your HSA--on Form 8853, which can only be attached to Form 1040 (Learn how to file Form 1040). We will automatically select this form for you on eFile.com if you qualify for it based on your answers our tax interview.
Flexible Spending Account or Arrangement (FSA)
A Flexible Spending Arrangement or Account (FSA) is an employer-sponsored account that helps you pay for you and your family's medical expenses. An FSA is funded by voluntary paycheck withholding and by employer contributions. All money contributed to an FSA is completely tax-free for you. No payroll or income taxes are withheld from your contributions to an FSA, and contributions by your employer are excluded from your taxable income. Withdrawals from a Flexible Spending Account are tax-free if the money is spent on qualified medical expenses (see a list of qualified medical expenses).
You can only establish an FSA through your employer. Self-employed people are not eligible. You do not have to be covered by a high-deductible plan or by any other health plan to qualify for an FSA.
The maximum amount you can contribute to an FSA through paycheck withholding is $2,700 for 2019 ($2,750 is the maximum contribution amount for 2020). There is no IRS-imposed limit on the amount your employer can contribute. There may be other limits if you are considered a highly compensated employee.
At the beginning of each year in which you have a Flexible Spending Account, you must decide the amount that you will contribute to it over the course of the year. It is important not to contribute too much to an FSA, because FSAs are "use-it-or-lose-it". This means that you must spend the money in the account by the end of the year or else any remaining amount is forfeited. However, your employer can provide up to a 2 and 1/2 month grace period for you to spend the money in the following year. It is also possible to roll over funds from an FSA to a Health Savings Account, tax-free. Rollover contributions to HSAs have no dollar amount limit, but you may only make one rollover contribution per 1-year period.
You do not report Flexible Spending Account contributions nor distributions on your tax return.
Health Reimbursement Arrangement (HRA)
A Health Reimbursement Arrangement (HRA) is an employer-sponsored plan that reimburses you for the health care costs of you and your family. Your employer is the only one who can contribute to your HRA.
An HRA is established by your employer, so self-employed individuals are not eligible. There is no requirement to be covered (or not covered) by any other type of health plan, so you can enroll in an HRA if it is offered by your employer, no matter what other health coverage you have (or do not have).
Health Reimbursement Arrangements are solely funded by your employer, and your employer can set the maximum coverage amount. Employer contributions are tax-free income to you. Reimbursements are excluded from your taxable income if the money was spent on qualified health costs and medical expenses (see a list of qualified medical expenses). There may be some exceptions if you are considered a highly compensated employee. Unlike FSA funds, unused funds in an HRA at the end of the year are not forfeited and can be carried forward to later years.
Information about a Health Reimbursement Arrangement is not reported on your tax return.
Tax Tip: You can itemize and deduct medical expenses that are not covered by one of these health plans.
For more details on any of the above, see Publication 969 - Health Savings Accounts and Other Tax-Favored Health Plans.
Find out about deducting medical expenses that are not covered by one of these plans.
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