CRS Reports on HSA Qualified Medical Expenses

December 17, 2024

On November 15, 2024, the Congressional Research Service (CRS) published a report on HSA Qualified Medical Expenses. The report describes HSA-qualified medical expenses and legislative approaches to amend HSA-qualified medical expenses.

HSA funds that are distributed for qualified medical expenses of the account holder, spouse, and any of their tax dependents are not subject to federal tax. Over the years, Congress has broadened the items and services that are considered qualified medical expenses (e.g., OTC drugs purchased without a prescription and more recently, menstrual products).

However, the report provides CRS’s observations that expanding the items and services that are considered HSA-qualified medical expenses could reduce federal revenues. CRS proposes several policy issues for Congress to consider when modifying the items and services that can be paid for using an HSA.

Congress has used two legislative approaches to amend and expand the list of HSA-qualified medical expenses:

• Amending the definition of medical care at IRC Section 213(d), which has broader effects impacting not only HSAs but also FSAs, HRAs, and other health-related tax-advantaged accounts, or
• Amending IRC Section 223 directly to create or address an HSA-specific rule.

The report states that policies amending IRC Section 213(d) could result in a larger budgetary impact as compared with a similar policy focused on HSAs alone. For example, the Congressional Budget Office estimated that the CARES Act expansion of qualified medical expenses for HSAs, FSAs, HRAs, and Archer MSAs to include over-the-counter medicines and menstrual care products would reduce revenues by $9 billion from 2020 to 2030 because individuals are expected to contribute more to these accounts because of expanded qualified medical expenses. The report suggests Congress consider whether such modifications are consistent with the intent that Congress had when it passed legislation establishing HSAs and the extent to which a change to such structure is warranted.

Many plan sponsors offer HDHPs and HSA programs to their employees and have welcomed the expansion of healthcare items and services that can be considered qualified medical expenses and thus payable from HSAs on a tax-free basis. The report provides a somewhat sobering view, for consideration by Congress, of the budgetary impact of the further expansion of such expenses and ways to reduce that impact. However, given the incoming administration’s stated desire to increase the flexibility of HSAs, it’s unclear whether and to what extent the budgetary concerns will factor into related legislation.

Health Savings Account (HSA) Qualified Medical Expenses