An Introduction to Health Savings Accounts

The Medicare Reform law, which contains provisions establishing health savings accounts (HSAs), was made effective January 1, 2004. One significant feature of the new HSA is that, unlike a Flexible Spending Account, or FSA, the unused money in the HSA account can rollover from year to year. This provides for a great way to save for qualified health expenses. An eligible individual is any individual who is covered under a high-deductible health plan (HDHP) and is not currently entitled to benefits under Medicare.

The IRS Section 223 defines an HDHP as a health plan with a minimum deductible of $1,000 for individual (or $2,000 for family), and annual out-of-pocket maximums not to exceed $5,000 (or $10,000 for family). According to the IRS, no benefits from the HDHP are to be paid prior to the individual meeting the deductible with the exception of preventative care.

Individuals and families can make tax-deductible contributions to an HSA, and use it to pay for out-of-pocket medical expenses. HSA funds may also be used to pay for qualified medical expenses using pre-tax dollars. This allows employers to offer another vehicle by which they can allow their employees to become more aware and careful of their health care costs. Participants own their HSA and can take it along when they change jobs, like a 401K plan.