Health Savings Accounts (HSA’s) are a new option for health insurance and they have two parts. The first part is a health insurance policy that covers large hospital bills. The second part of the Health Savings Account is an investment account or retirement account from which you can withdraw money tax-free for medical care. Otherwise, the money accumulates with tax-free interest until retirement, when you can withdraw for any purpose and pay normal income taxes.

Overview of HSA’s:

Health Savings Accounts (HSA’s) are a recently available way people can pay for un-reimbursed medical expenses (deductibles, co-payments, and services not covered by insurance) on a tax-advantaged basis. HSA’s can be established and funded by eligible individuals when they have a qualifying high deductible health plan and no other health plan, with some exceptions.

The tax advantages of HSA’s can be significant for some people: contributions are deductible (or excluded from income that is taxable if made by employers), withdrawals are not taxed if used for medical expenses, and account earnings are tax exempt. Unused balances may accumulate without limit.

HSA’s and the accompanying high deductible health plans are one form of what some call “consumer-driven health plans.” One objective of these plans is to encourage individuals and families to set money aside for their health care expenses. Another is to give them a financial incentive for spending health care dollars prudently. Still another goal is to give them the means to pay for health care services of their own choosing, without constraint by insurers or employers.