A Health Savings Account (HSA) is a tax-deferred account to be used exclusively for paying medical expenses. Funds placed in the account can grow tax free through investments or just accumulate interest in the savings account. In contrast to Flexible Spending Arrangements (FSAs), the funds in HSAs are not lost at the end of the year and can continue to be used by the holder even if he or she leaves the employer.
"The Medicare Prescription Drug, Improvement, and Modernization Act of 2003" was signed into law by President Bush on Dec. 8, 2003.
HSA holders must be enrolled in a high deductible health plan–a plan with a minimum deductible of $1,100 for individuals and $2,200 for families–and cannot have any other form of first-dollar coverage, be claimed as a dependent on someone else’s tax return or be enrolled in Medicare in order to be eligible. HSA holders who later choose to enroll in Medicare must stop making HSA contributions, but can continue to use the money already in the account tax free.
Medical expenses must be paid out-of-pocket until the deductible is reached, and the money in the HSA can be used to cover these costs. Both employers and employees can contribute to the HSA. For 2008, individuals can contribute up to $2,900 and families can contribute up to $5,800. Contributions to the HSA are tax free and will never be taxed if used for legitimate medical expenses. HSA funds used for non-medical expenses will be subject to a 10 percent tax penalty unless the holder is over 65 or becomes disabled.