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Can HSAs Provide Tax-Free Reimbursement for the Same Expenses as Health FSAs?

EBIA  

EBIA  

QUESTION: Our company currently offers a general-purpose health FSA. If we switched to an HDHP/HSA, could our employees receive tax-free reimbursements for the same types of expenses from their HSAs?

ANSWER: Yes, and they might acquire a few additional options. Like health FSAs, HSAs can provide tax-free reimbursement of out-of-pocket expenses for medical care as defined in Code § 213(d). But HSAs also can reimburse certain expenses that health FSAs cannot. Those differences are highlighted below.

  • Nonmedical Expenses. Unlike health FSAs, HSAs can make distributions at any time and for any purpose, although only distributions for qualified medical expenses are tax-free. Some taxable distributions may also be subject to a 20% excise tax.
  • Insurance Premiums. While HSAs generally cannot reimburse health insurance premiums or coverage contributions on a tax-free basis, there are a few exceptions: (1) qualified long-term care insurance, (2) any federally required continuation coverage (e.g., under COBRA or USERRA), (3) health plan coverage while the HSA account holder is receiving unemployment compensation under state or federal law, and (4) for HSA holders who are age 65 or older, any health insurance other than a Medicare supplemental policy.
  • Qualified Long-Term Care. Unlike health FSAs, HSAs can reimburse qualified long-term care services on a tax-free basis.

In addition, HSAs cannot limit the types of expenses that are reimbursable on either a taxable or tax-free basis because they are individual trusts to which account holders must have unrestricted access, subject only to reasonable restrictions on the frequency or minimum amounts of distributions. HSAs are also different in terms of whose expenses they can reimburse tax-free. Health FSAs can provide tax-free reimbursements for the expenses of employees’ children who are under age 27 at the end of the taxable year, regardless of their status as tax dependents. However, HSAs can only provide tax-free payment or reimbursement of the expenses of an HSA account holder’s child if the child qualifies as a dependent. Keep in mind that other requirements (e.g., regarding substantiation of expenses) will also apply and may vary from arrangement to arrangement.

For more information, see EBIA’s Consumer-Driven Health Care manual at Sections V.D (“Chart Comparing HSAs, HRAs, and Health FSAs”), XV.C (“What Is an HSA-Qualified Medical Expense?”), and XV.E (“HSA Distributions for Nonmedical Expenses”). See also EBIA’s Cafeteria Plans manual at Section XX (“What Expenses Can Be Reimbursed Under a Health FSA?”). You may also be interested in EBIA’s Health Care Expenses Table, which makes it easy for employers, employees, administrators, and others to determine online what expenses qualify for reimbursement by a health FSA or HRA, or for tax-free distribution from an HSA.

Contributing Editors: EBIA Staff.

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