History

• The HSA plan became operable in 2004 and was designed to be a new kind of health insurance. Concerned about the rising cost of health care and a lack of beneficial competition within the industry, the U.S. government created HSAs to put control in the hands of consumers. HSA plans utilize a high deductible that covers large expenditures and some preventive care while the consumer uses a tax-exempt savings account to cover the in-between expenses.
  
  

High-Deductible Health Plans

• The high-deductible health plan is the first component of an HSA. This plan is like a regular health insurance plan in that it covers your medical expenses once you have paid a minimum amount, known as a deductible. The HDHP may also cover some preventive care such as annual checkups, immunizations and prenatal care. In exchange for this service, you pay a monthly premium.
  
  The HDHP differs from most insurance plans in that the deductible is much higher than is typical in other plans. While some plans may have deductibles of a few hundred dollars or even no deductible at all, the HDHP deductible will be several thousand dollars ($1,200 minimum for a single person in 2010). Participants in an HDHP pay a significantly smaller premium than they would pay for a lower-deductible plan.
  
  

Health Savings Accounts

• The HSA is designed to bridge the gap between covered preventive care and the large-scale medical attention that puts consumers over out-of-pocket spending limits. A modification of the more familiar cafeteria plans, the HSA allows you to place pretax money aside over time and withdraw it tax-free to pay for qualified medical expenses.
  
  There is an annual limit to HSA contributions ($3,050 for single coverage in 2010), but you may hold this money in savings as long as you like. This means that money you do not use now can be saved--tax-free--to pay for future medical expenses. If you receive your HSA through an employer, the employer will likely make contributions to the HSA as well, and these do not affect the amount you can contribute on your own.
  
  

Qualifications

• To qualify for an HSA you cannot be enrolled in another form of comprehensive medical insurance. If you are married, you cannot be covered by your spouse's insurance and have your own HSA. You may, however, take out specific policies for things that are not otherwise covered by the plan, such as supplementary vision and dental insurance.
  
  Like individual retirement accounts and other retirement plans, there is a penalty for withdrawing HSA money for non-qualified expenses, and you must pay tax on the distribution.
  
  

Considerations

• HSAs are very portable--you may roll over an HSA into another HSA or keep the account open and add a new HDHP if you switch employers. You pay only for the medical expenses you incur during the year--if you don't use the money in your HSA you do not lose it.
  
  HSAs are best for those who have low medical costs now but expect that the cost of their healthcare will rise in the future. Your annual contribution may not fully cover your total out-of-pocket expenses for a year, so it is important to take your personal cash flow into consideration prior to enrollment.