Health Saving Account

Health Saving Account: An account that allows individuals to pay for current health expenses and save for future qualified medical and retiree health expenses on a tax free basis.

Health Savings Accounts (HSAs) were created by H. R. 1, the "Medicare Prescription Drug, Improvement and Modernization Act of 2003," which was signed into law by US President George W. Bush on December 8, 2003.

HSAs allow employers and/or employees to contribute to a tax-deferred personal savings account which is used to pay smaller and routine medical expenses. HSAs must be linked to a high-deductible health insurance policy with a minimum $1,000 deducible for an individual or $2,000 for a family.

HSAs have met with criticism as well as praise. One criticism of HSAs is that they do little to reduce the number of people without health insurance in the US. Another criticism of HSAs is only younger, healthier and more affluent white-collar workers buy them. Professional and managerial applicants for HSAs make up the majority of the application pool. Less than a third of purchasers of HSAs have family incomes less than $50,000 per year.

On a more positive note, the following statement is from the US Treasury Department:

New innovative Health Savings Accounts will change the way millions can save to meet their health care needs.

Any individual who is covered by a high-deductible health plan may establish an HSA. Amounts contributed to an HSA belong to individuals and are completely portable. Every year the money not spent would stay in the account and gain interest tax-free, just like an IRA. Unused amounts remain available for later years (unlike amounts in Flexible Spending Arrangements that are forfeited if not used by the end of the year). Tax-advantaged contributions can be made in three ways: the individual and family members can make tax deductible contributions to the HSA even if the individual does not itemize deductions, the individual's employer can make contributions that are not taxed to either the employer or the employee, and employers with cafeteria plans can allow employees to contribute untaxed salary through a salary reduction plan. Funds distributed from the HSA are not taxed if they are used to pay qualifying medical expenses. To encourage saving for health expenses after retirement, HSA owners between age 55 and 65 are allowed to make additional catch-up contributions ($500 in 2004) to their HSAs. Individuals eligible for Medicare, may not open an HSA.

Tax-advantaged contributions can be made in three ways:

  1. the individual and family members can make tax deductible contributions to the HSA even if the individual does not itemize deductions,
  2. the individual's employer can make contributions that are not taxed to either the employer or the employee, and
  3. employers with cafeteria plans can allow employees to contribute untaxed salary through a salary reduction plan.

Funds distributed from the HSA are not taxed if they are used to pay qualifying medical expenses. To encourage saving for health expenses after retirement, HSA owners between age 55 and 65 are allowed to make additional catch-up contributions ($500 in 2004) to their HSAs. Individuals eligible for Medicare, may not open an HSA.