Regulatory Context for Health Savings

Federal law establishes a layered framework governing Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), and Health Reimbursement Arrangements (HRAs) — each account type subject to distinct statutory authority, IRS rulemaking, and agency guidance that determines eligibility, contribution limits, and permissible uses. Understanding which rules apply, where those rules originate, and where enforcement authority ends is essential for employers designing benefit plans and for individuals navigating tax-advantaged health account decisions. This page maps the regulatory structure across all three major account types, identifies exemptions and carve-outs, flags known gaps in authority, and traces the documented shifts in the regulatory landscape. For a broader orientation to the landscape of health savings options, the National Health Savings Authority covers the full scope of account types and planning considerations.

Exemptions and Carve-Outs

Not every health-related expense or account arrangement falls cleanly within standard regulatory requirements. Federal statute and IRS guidance recognize specific carve-outs that modify default rules for defined populations and plan structures.

HSA Exemptions

Under 26 U.S.C. § 223, HSA eligibility requires enrollment in a High Deductible Health Plan (HDHP). However, certain preventive care services — as defined by IRS Notice 2004-23 and expanded by IRS Notice 2019-45 — may be covered by an HDHP before the deductible is met without disqualifying HSA eligibility. The 2019 expansion added 14 specific chronic condition treatments (including certain insulin products, blood pressure monitors, and inhaler medications) to the list of services exempt from the deductible requirement.

Veterans enrolled in VA health benefits for a service-connected disability retain HSA eligibility even though VA coverage is not an HDHP, provided the VA coverage is limited to the service-connected condition (IRS Notice 2004-50, Q&A 6).

FSA Carve-Outs

FSAs are governed primarily by 26 U.S.C. § 106 and § 125, which establishes cafeteria plan requirements. The use-it-or-lose-it rule is statutory in origin, but IRS Notice 2005-42 and IRS Notice 2013-71 introduced two administrative carve-outs: a grace period extension of up to 2.5 months beyond plan year end, and an optional carryover of up to $640 (as indexed for 2024 per IRS Revenue Procedure 2023-34). Plans may adopt one option, but not both simultaneously.

HRA Carve-Outs

HRAs are purely employer-funded arrangements under 26 U.S.C. § 105. The Qualified Small Employer HRA (QSEHRA) and Individual Coverage HRA (ICHRA), established by the 21st Century Cures Act (2016) and final rules published in 84 FR 28888 (2019), operate under distinct contribution caps and employer size rules that carve them out from the general group health plan noncompliance penalties under the Affordable Care Act.

Where Gaps in Authority Exist

Despite the density of federal rulemaking, defined gaps in authority create ambiguity for plan administrators and account holders.

State-Level Interaction

Federal HSA rules preempt inconsistent state law for federal tax purposes, but states retain authority over their own income tax treatment. As of 2024, California and New Jersey do not conform to federal HSA tax exclusions, meaning HSA contributions remain subject to state income tax in those states (California Revenue and Taxation Code § 17215.4). No federal agency has authority to compel state conformity.

Substantiation for FSAs

The IRS has authority over eligibility determinations but does not specify the exact documentation format employers or third-party administrators must use for expense substantiation. IRS Revenue Ruling 2003-43 establishes the principle that claims must be "substantiated," but implementation standards — including what constitutes adequate documentation for over-the-counter items — remain largely at the discretion of plan administrators, creating inconsistent enforcement across employers.

ICHRA and Marketplace Coordination

The interaction between ICHRA eligibility and Marketplace premium tax credit (PTC) eligibility creates a gap that neither HHS nor the IRS has fully resolved through rulemaking. An individual offered an ICHRA is generally ineligible for PTC if the ICHRA is deemed "affordable" under 26 C.F.R. § 1.36B-2, but the affordability calculation methodology for ICHRAs differs from the traditional employer mandate affordability test, leaving edge cases — particularly for part-time employees — without definitive guidance as of the most recent IRS publications.

How the Regulatory Landscape Has Shifted

The regulatory framework for health savings accounts has undergone documented structural changes driven by legislation, agency rulemaking, and emergency authority.

  1. 2003 — HSA Creation: The Medicare Prescription Drug, Improvement, and Modernization Act (MMA) of 2003 (Pub. L. 108-173) established HSAs as a new account type, replacing the predecessor Archer MSA program with a broader, permanently authorized structure.

  2. 2010 — ACA Modifications: The Affordable Care Act altered FSA and HRA rules in two significant ways: it eliminated reimbursement of over-the-counter drugs without a prescription (later reversed in 2020), and it capped FSA contributions — a cap set at $2,500 for 2013, the first year of enforcement, as established under ACA § 9005.

  3. 2016 — QSEHRA Authorization: The 21st Century Cures Act created the QSEHRA, enabling small employers (fewer than 50 full-time equivalent employees) to fund individual-market premium reimbursements outside of a group health plan framework, with an annual cap indexed for inflation.

  4. 2019 — ICHRA Final Rule: The Departments of Health and Human Services, Labor, and Treasury jointly published rules creating the ICHRA, which removed the prior prohibition on HRAs being used to reimburse individual market premiums. This represented the most significant structural expansion of HRA authority since the ACA.

  5. 2020 — CARES Act OTC Expansion: The Coronavirus Aid, Relief, and Economic Security Act (Pub. L. 116-136) permanently restored over-the-counter drug and menstrual product eligibility for HSAs, FSAs, and HRAs — reversing the ACA restriction without requiring a prescription.

  6. 2021–2023 — Telehealth Carve-Out Extensions: Congress extended, through a series of appropriations measures, the temporary exemption allowing HDHPs to cover telehealth services before the deductible without affecting HSA eligibility — a provision that lapsed and was reinstated multiple times, illustrating the fragility of non-permanent statutory carve-outs.

Governing Sources of Authority

Health savings account regulation draws from four distinct layers of authority, each with defined scope and enforcement tools.

Statutory Authority

The Internal Revenue Code is the primary statutory source. Section 223 governs HSAs; Section 125 governs cafeteria plans (the vehicle through which most FSAs are offered on a pre-tax basis); Section 105 governs HRAs. The Employee Retirement Income Security Act (ERISA) applies to employer-sponsored FSA and HRA plans, giving the Department of Labor (DOL) enforcement jurisdiction over plan administration, claims procedures, and ERISA fiduciary obligations.

Agency Rulemaking

The IRS issues Revenue Procedures and Notices that set annual indexed limits — including HSA contribution limits, HDHP minimum deductibles, HDHP out-of-pocket maximums, and FSA carryover caps. The joint rulemaking between HHS, DOL, and the IRS (collectively "the Tri-Agency") governs ACA-related compliance for employer-sponsored health plans, including ICHRA affordability rules. For a detailed breakdown of IRS-specific rulemaking on HSAs, the IRS Rules Governing HSAs page provides a structured walkthrough.

ACA Compliance Layer

The ACA imposed market reform requirements on group health plans that interact with FSA and HRA design. HRAs that fail to comply with ACA market reforms could expose employers to excise taxes of $100 per day per affected individual under 26 U.S.C. § 4980D — a maximum penalty that can reach $36,500 per affected employee annually. The ICHRA final rule resolved this exposure for individual coverage reimbursements by treating qualifying ICHRAs as ACA-compliant.

State Law

States govern insurance product design (including HDHP plan structures offered within a state), small group market rules, and their own income tax conformity with federal health account statutes. State insurance commissioners regulate the carriers offering HDHPs, creating an indirect layer of oversight

The law belongs to the people. Georgia v. Public.Resource.Org, 590 U.S. (2020)