IRS Publication 969: Tax Rules for Health Plans

IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, is the official guide for understanding the rules governing these accounts. This article provides a simplified overview of the most common plans, clarifying their features, requirements, and financial implications. The goal is to help individuals understand their health benefit options and make informed decisions.

Health Savings Accounts (HSAs)

A Health Savings Account (HSA) is a tax-exempt account used to pay for qualified medical expenses. A defining feature is portability; the account is owned by the individual and remains with them if they change jobs or retire. Funds roll over each year, allowing savings to accumulate long-term.

To contribute to an HSA, you must be covered by a High Deductible Health Plan (HDHP). For 2025, an HDHP must have a minimum annual deductible of $1,650 for self-only coverage and $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. You cannot have other health coverage, like Medicare or a general-purpose FSA.

The maximum HSA contribution for 2025 is $4,300 for self-only coverage and $8,550 for family coverage, including employer contributions. Individuals age 55 or older can make an additional “catch-up” contribution of $1,000. If both spouses are over 55, they must have separate HSAs to each make a catch-up contribution.

HSAs offer a triple-tax advantage: contributions are tax-deductible, the funds can be invested and grow tax-free, and withdrawals for qualified medical expenses are tax-free. If funds are withdrawn for non-qualified expenses before age 65, the amount is included in gross income and subject to a 20% penalty. After age 65, the penalty no longer applies, but withdrawals for non-medical expenses are subject to regular income tax.

All contributions and distributions must be reported on Form 8889, which is filed with your annual tax return to calculate deductions and report distributions.

Archer MSAs and Medicare Advantage MSAs

Archer Medical Savings Accounts (MSAs) are legacy accounts that are no longer available for new enrollment. Existing account holders can continue to use them, and funds can be rolled over into an HSA without tax consequences.

A Medicare Advantage (MA) MSA is available to seniors enrolled in a high-deductible Medicare Advantage plan. Unlike other accounts, contributions are made directly by Medicare, not the individual. The funds can be used for qualified medical expenses, and any money left at the end of the year rolls over. Distributions for both Archer and MA MSAs are reported on IRS Form 8853.

Health Flexible Spending Arrangements (FSAs)

A Health Flexible Spending Arrangement (FSA) is an employer-established benefit allowing employees to set aside pre-tax money for qualified medical expenses through payroll deductions. This reduces an employee’s taxable income. Employers may also contribute to an FSA but are not required to do so.

The defining feature of an FSA is the “use-it-or-lose-it” rule, which requires any money left in the account at the end of the plan year to be forfeited to the employer. To mitigate this, employers may offer one of two options. The first is a grace period, giving employees an additional 2.5 months after the plan year ends to use their remaining balance.

The second option is a carryover provision, which allows employees to move a certain amount of unused funds to the next year. For plan years ending in 2025, the maximum carryover is $660. An employer can offer the grace period, the carryover, or neither, but not both.

For 2025, the maximum employee contribution to an FSA is $3,300. If spouses both have access to an FSA through their employers, each can contribute up to the maximum in their own account.

Health Reimbursement Arrangements (HRAs)

A Health Reimbursement Arrangement (HRA) is funded exclusively by the employer; employees cannot contribute. The employer sets the contribution amount and determines which medical expenses are eligible for reimbursement. Reimbursements for qualified medical expenses are tax-free to the employee.

An employee must first incur an expense and then submit a claim. Depending on the plan, unused funds may roll over from year to year. However, the HRA is employer-owned, so funds are not portable and are forfeited if the employee leaves the company.

Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)

A QSEHRA is available to businesses with fewer than 50 full-time employees that do not offer a group health plan. It allows employers to reimburse employees for insurance premiums and other medical costs. For 2025, total reimbursements cannot exceed $6,350 for self-only coverage or $12,800 for family coverage.

Individual Coverage Health Reimbursement Arrangement (ICHRA)

An ICHRA can be offered by employers of any size to reimburse employees for the cost of health insurance purchased in the individual market. Employers can set different reimbursement levels for different classes of employees. An ICHRA may affect an employee’s eligibility for premium tax credits on the health insurance marketplace.

Qualified Medical Expenses

Qualified medical expenses are the costs of diagnosing, curing, treating, or preventing disease, as defined in IRS Publication 502. This definition applies to all tax-favored health plans discussed in this article. The expense must be primarily to alleviate or prevent a physical or mental illness.

Common examples of qualified medical expenses include:

• Payments for doctor visits, hospital services, and prescription medications
• Dental and vision care, including braces, fillings, eyeglasses, and contacts
• Copayments and deductibles
• Treatments like acupuncture, chiropractic care, and physical therapy
• Over-the-counter medicines, which do not require a prescription

Expenses that are merely beneficial to general health, such as gym memberships or vitamins, are not qualified. Cosmetic surgery is also excluded unless it is to correct a deformity from an accident, congenital abnormality, or disfiguring disease.

Account holders must keep records for every distribution from their health accounts, such as receipts and invoices. In an IRS audit, the taxpayer is responsible for proving that each withdrawal was for a qualified medical expense. Failure to provide proof can result in the distribution being treated as taxable income and subject to penalties.