Health Savings Accounts are designed to compliment high deductible group and individual insurance policies. Consumers often choose high deductible policies in order to pay a lower premium. The amount saved by purchasing the higher-deductible/lower premium policy is contributed to a HSA account to pay for qualified medical expenses.

Dollars contributed into a HSA by an individual or an employer are considered pre-tax. In this way, a Health Savings Account works much like an Individual Retirement Account. The contributions to a HSA are tax deductible and grow tax deferred. A money market account can be used to safely invest the contributions until they might be needed. (In addition, many plans offer mutual funds as an investment option in order to further increase the value of the account.) Plan owners are not taxed on any interest or fund appreciation in the account as long as funds are used for qualified expenses.

Unused dollars in a HSA plan rollover year to year while the account value increases through tax deferral. The plans are portable, meaning the contributions are not lost should coverage be discontinued with the insurance company. The insured owns all deposits and can name a beneficiary for the proceeds at passing. If funds still remain in the account at age 65, they are usually withdrawn by the owner and taxed as ordinary income. (Once age 65 is reached most consumers discontinue their health insurance plans, opt into Medicare and purchase a Medicare Supplement.)

Eligibility and Contribution Limits

There are a few criteria that must be met in order to participate in a HSA. Namely, individuals or employees must be enrolled in a high deductible health plan. An annual deductible of at least $1,000 for an individual and $2,000 for a family must be selected. In addition, participants must not be enrolled in another qualified high deductible health insurance plan or be enrolled in Medicare.

Contribution limits for 2006 are $2,700 for individuals, $5,250 for families or the amount of the deductible- whichever is less. Contributions are pro-rated based on the calendar year. If enrollment occurs in July, then only 50% of the contribution limit can be deposited in that particular year. The full amount could be contributed the next year.

Health Savings Accounts are designed to be easily maintained and operated. They can be managed online at websites set up by the provider. Additionally, many companies issue checkbooks or credit cards to the insured that draw directly from the HSA funds. In many cases, a high deductible insurance policy coupled with a Health Savings Account will provide more savings to the insured than a traditional insurance plan.