Health Savings Account

What it protects against

The financial consequences of illness or injury.

How it works

A health savings account, coupled with a high-deductible health insurance policy, can be funded with pre-tax dollars. The account can be tapped for medical expenses that are not reimbursable under the health plan. Money in the account grows tax-free and can be withdrawn without tax to pay qualified medical expenses. Unspent amounts carry over from year to year, so account owners can accumulate large amounts over their lifetimes to pay medical expenses that may become greater as they age. High-deductible health plans should be 30% to 35% less expensive than traditional coverages. An HSA is portable, and upon your death, your spouse or other beneficiary becomes the owner.

Who needs it

HSAs may be especially useful to groups that have had the hardest time paying for health insurance: the self-employed or employees of small companies. HSAs may also offer people more treatment choices than a health maintenance organization or other managed-care plan; instead of being barred from a particular test or specialist, a person can use a health savings account to pay for preferred treatment.

Who may not need it

Employees covered by traditional health insurance plans offered by their employers are not eligible for HSAs.

When to buy it

Early in life, because the longer money in a health savings account is invested, the greater it will grow over time. Many young workers forgo health insurance offered by their employers. While young employees are less likely than older employees to become seriously ill, both are subject to injury through accident, and there are no guarantees either will avoid serious illness.

How you pay for it

Employees and employers may share the cost, or either party may pay entirely. Annual contributions are limited by law. You may contribute as late as April 15 of the following year. You may no longer contribute once enrolled in Medicare.

Terms to Know

  • Additional money you can contribute to a Health Savings Account if you have reached the age of 55 before the end of a taxable year.
  • An IRS-approved tax-advantaged benefit that reimburses employees for medical care expenses not covered by the employer-sponsored health plan. It is funded exclusively by the employer. Unused balances may be rolled over to the next coverage period based on the employer's plan design. Qualified expenses are paid tax-free. Owners of high-deductible health plans who are not qualified for a Health Savings Account can use an HRA, but they do not own the money in an HRA, and HRAs are not portable.
  • A health plan with lower premiums that covers health-care expenses only after the insured has paid each year a large amount out of pocket or from another source. To qualify as a health plan coupled with a Health Savings Account, the Internal Revenue Code requires the deductible to be at least $1,000 for an individual and $2,000 for a family. High-deductible plans are also known as catastrophic plans.