What is a Health Savings Account?

Health Savings Accounts (HSA's) have been in effect since 2004. These accounts offer the following benefits:

They are tax favored savings accounts.

They may help you save money since the monthly payments may be less than the premium on a lower deductible health insurance plan.

Contributions to an HSA may be made pre-tax up to eligibility limits.

Funds inside of an HSA may be able to be invested at your discretion.

Specifically, Health Savings Accounts are:

Tax-advantaged: Neither contributions, earnings, or withdrawals (for qualified medical expenses) are taxed.
Flexibility: Money accumulates and remains with the employee (is non-forfeitable); can be used for non-medical expenses (subject to ordinary tax, plus a 10 percent penalty if the employee is under age 65).
Portable: Accounts move with the employee when they change employers.
Savings mechanism for future health needs: Unused contributions accumulate and can be "banked" for future medical expenses. Funds can be invested for higher returns.
Contributions can come from multiple sources: Employer, employee, or family members can all contribute to HSAs.
Tax-free distributions are also allowed for health care needs not covered by the beneficiary's insurance policy, COBRA, health insurance for the unemployed and long term health care insurance.

How do employers benefit from offering Health Savings Accounts?

Health Care Savings Accounts make high-deductible consumer-driven plans more attractive to employees compared with earlier MSAs or HRAs, increasing the likelihood that these plans, if optional, will be selected. With the cost of care rising, employers are running out of options. Many are turning to consumer-driven health plans, which are aimed at getting individuals more actively involved in their own medical care: and encouraging them to make decisions that take into account the cost of services. Because consumer-driven health plans typically feature a high-deductible plan design with a lower premium, cost of coverage to the employer ends to be lower.

Who can open an Health Care Savings Account?

The Medicare Act of 2003 included a section allowing "eligible individuals" to establish HSAs beginning January 1, 2004. An "eligible individual" means, with respect to any month, any individual who must:

1) be covered by a high-deductible health plan on the first day of such month
2) not be covered by any medical plan that is not a high-deductible health plan (dental and vision plans are not included in this)
3) not be entitled to Medicare benefits (generally, has not yet reached age 65)
4) not be able to be claimed as a dependent on another individual's tax return.