Increases in the cost for health care and health insurance now impact both employees receiving their health insurance through an employer group plan and the self-employed seeking individual and family health insurance. Whichever group you fall into, you've probably noticed the rising costs of health insurance. Deductibles and other out-of-pocket expenses have risen to the point that, without careful planning, they can put a serious financial strain on the average American family. In December of 2003, the government took steps to ease the burden on working people when it comes to paying for their health care. The resulting legislation established the Health Savings Account.



A Health Savings Account, or HSA, is an account that allows you to save your pre-tax money for out-of-pocket medical expenses. Unlike a flexible spending account (FSA), any money left over at the end of the year can be saved and used for following years. The money may also grow through investments, just like the funds in an IRA, depending on how and where you establish your account.

Health Savings Accounts are specifically designed for people with high-deductible insurance plans who do not have any other first-dollar medical coverage. Coverage specific to injury, accident, disability, dental, vision and long-term care insurance is permitted, however, without affecting eligibility for an HSA. Exceptions are those eligible for Medicare (over 65) and anyone who can be claimed as a dependent on someone else's tax return. Individuals in these categories will not be able to open a Health Savings Account.

How to Establish a Health Savings Account

Your bank, credit union, and insurance company are a few places that can serve as trustees for your Health Savings Account. Any financial institution that handles IRAs or Archer MSAs may also offer the accounts. Once the account is set up, you and/or your employer may make regular deposits up to your allowed deposit amount. This amount is determined by the size of your annual health insurance deductible.

Once you've established the account, you'll have a great deal of flexibility. You can choose to use the money for all or part of any qualified out-of-pocket medical expense. Qualified expenses range from co-pay and deductible amounts to prescriptions and even over-the-counter drugs such as aspirin and cold medicine. Insurance premiums generally are not approved; however, premiums for dental, vision, disability and long-term care may be eligible.

Health Savings Account Funds

The funds in the account belong to you and can be rolled over into some other tax-advantaged accounts such as an IRA if you so choose. You can use the funds for qualified medical expenses until you turn 65. You can also draw on your funds at any time for non-medical expenses; however, you will have to pay income tax on the amount as well as an additional 10% penalty for withdrawing the funds for non-medical purposes. After you reach age 65 you must withdraw the funds or roll them over penalty-free.

How you use your HSA is up to you. You may view it as a way to save in the short term to pay for your out-of-pocket medical expenses year to year, or you may decide that you'd rather use the account to accumulate funds toward the medical expenses you'll incur in your retirement before age 65. Either way, the HSA is a new resource that may make the cost of health insurance less burdensome.