IRS Publication 969: Rules for HSAs, FSAs, and HRAs
Understand the IRS rules for your tax-favored health account. This guide covers contribution limits, qualified expenses, and tax reporting requirements.
IRS Publication 969 provides guidance for taxpayers navigating tax-favored health plans. It outlines the regulations for Health Savings Accounts (HSAs), Health Flexible Spending Arrangements (FSAs), and Health Reimbursement Arrangements (HRAs). The publication explains the rules regarding eligibility, contributions, and distributions for each account type.
Understanding Health Savings Accounts (HSAs)
A Health Savings Account (HSA) is a tax-advantaged savings account for healthcare expenses. Contributions are tax-deductible, the funds grow tax-free, and withdrawals for qualified medical expenses are also tax-free. The funds belong to the account holder and roll over annually, allowing the balance to grow.
A primary requirement for contributing to an HSA is enrollment in a High-Deductible Health Plan (HDHP). For 2025, the IRS defines an HDHP as a plan with a minimum deductible of $1,650 for self-only coverage or $3,300 for family coverage. The plan must also have a maximum out-of-pocket expense limit of $8,300 for self-only coverage and $16,600 for family coverage.
The IRS sets annual limits on HSA contributions. For 2025, the limit is $4,300 for an individual with self-only HDHP coverage and $8,550 for an individual with family coverage. Contributions for a tax year can be made until the tax filing deadline of the following year, not including extensions.
Individuals age 55 or older who are not enrolled in Medicare can make additional “catch-up” contributions of $1,000 annually. An eligible individual with self-only coverage could contribute up to $5,300 in 2025, while someone with family coverage could contribute up to $9,550.
Funds from an HSA can be withdrawn tax-free to pay for qualified medical expenses. It is important to keep records and receipts for these expenditures for a potential IRS audit. Qualified expenses include:
- Medical, dental, and vision care
- Prescription drugs and insulin
- Over-the-counter medicines
- Menstrual care products
Using HSA funds for non-qualified expenses has tax consequences. The distributed amount is included in the account holder’s gross income and is subject to income tax, plus an additional 20% tax penalty. This penalty is waived for individuals who are age 65 or older or have become disabled.
HSA funds are portable and remain with the account holder even if they change employers. Upon the death of the account holder, if the beneficiary is the surviving spouse, the HSA is treated as their own. If the beneficiary is not a spouse, the account ceases to be an HSA and its value becomes taxable income to the beneficiary.
Navigating Flexible Spending Arrangements (FSAs)
A Health Flexible Spending Arrangement (FSA) is an employer-established benefit that allows employees to set aside pre-tax money for medical expenses. These accounts are funded through voluntary salary reduction agreements, which reduces an employee’s taxable income. Employer contributions are also permissible.
For plan years beginning in 2025, the maximum employee contribution to a health FSA is $3,300. Employers have the discretion to set a lower limit. A married couple could each contribute up to the maximum to their respective FSAs if offered by their employers.
A defining feature of FSAs is the “use-it-or-lose-it” rule, which requires that funds be used for qualified medical expenses incurred during the plan year. Any money left in the account at the end of the year is forfeited to the employer.
To mitigate this rule, employers may offer one of two options, but not both. The first is a grace period of up to two months and 15 days after the plan year ends, allowing extra time to use the funds. The second option is a carryover, which permits employees to move up to $660 of unused funds into the next plan year.
The list of qualified medical expenses for an FSA is the same as for an HSA. However, health insurance premiums are not an eligible expense for reimbursement from a health FSA. Employees should consult their employer’s plan documents for specific details.
Explaining Health Reimbursement Arrangements (HRAs)
A Health Reimbursement Arrangement (HRA) is funded exclusively by an employer; employees cannot contribute. The HRA reimburses employees for qualified medical expenses up to a specified annual limit set by the employer. The employee pays for a medical cost and submits proof of the expense for a tax-free reimbursement.
HRAs are not bank accounts owned by the employee. Instead, funds are paid out by the employer as reimbursements are claimed. The specific rules of an HRA are determined by the employer’s plan design and can vary significantly.
Whether unused HRA funds can be carried over to the next year depends on the employer’s plan. Some plans may allow unused amounts to roll over, while others may have a use-it-or-lose-it provision. If an employee leaves the company, any remaining HRA balance is typically forfeited.
Tax Reporting for Health Accounts
Taxpayers with an HSA must file Form 8889, Health Savings Account (HSA) Transactions, with their Form 1040. This form is used to report contributions, calculate the HSA deduction, and report distributions. The financial institution holding your account will send you Form 1099-SA, which reports the gross distribution amount needed to complete Form 8889.
Employer contributions to your HSA, including pre-tax payroll deductions, are reported on your Form W-2 in Box 12 with the code “W”. This information is transferred to Form 8889 to help calculate your total contributions and determine if you have exceeded the annual limit.
There are no specific tax forms an individual needs to file for an FSA or an HRA. Reimbursements from these accounts for qualified medical expenses are tax-free and do not need to be reported as income. The tax benefit of an FSA is realized through pre-tax contributions, which reduces the taxable income reported on your Form W-2.