A Health Savings Account, or HSA, is a special kind of savings account designed to be used in conjunction with a type of insurance known as a high deductible health plan, or HDHP. The underlying purpose of HSA accounts is to help you pay for medical expenses.
Identification
HDHPs, as the name suggests, have high annual deductibles that must be paid for by you before your insurance begins to pay for medical expenses. Because the deductible is high, monthly premiums are usually lower than they would be for a traditional HMO or PPO insurance plan. People who have insurance through an HDHP are eligible for an HSA.
Function
When you open an HSA, you can use it to set aside money for your current and future medical expenses. The money in your HSA is tax-free: depending on how you set it up, you can either deduct it from your taxes or make pre-tax contributions to your account. When you have a medical expense, such as a doctor's visit or a new prescription, you can use the money in your HSA to pay toward your deductible.
Benefits
Using a combination of HDHP coverage and an HSA can significantly lower your annual health insurance costs. Because you make contributions to your HSA, you have control over how much money you have to spend on medical expenses. An HSA is portable, which means you can take the money you contribute with you if you change jobs or insurance plans in the future. The money you contribute collects interest and rolls over every year.
Considerations
In order to be eligible for an HSA, you must have an HDHP and no other insurance. (In some cases, you may be able to have a disease-specific insurance plan in addition to an HDHP and still qualify for an HSA, but check with your provider for details.) If you switch to a different insurance plan, you can't make additional contributions to your HSA. There's a limit to how much money you can contribute to your HSA each year: The limit for an individual HSA contribution is 2009 was $3,000.
Warning
An HDHP and HSA combination can be a good insurance solution for generally healthy people who want low monthly insurance payments, but they are different from traditional health insurance in that you will have to pay out-of-pocket for most of your doctor's visits, medications and treatments until you meet your deductible. Be sure you understand any health insurance plan before you cancel an existing policy.
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