health savings account

A health savings account (HSA) is a tax-advantaged savings account available to people enrolled in a qualifying high-deductible health plan (HDHP). HSAs allow you to set aside money for eligible medical expenses while receiving certain tax benefits.

HSAs were created under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. Contributions to an HSA may be tax deductible, employer contributions are generally excluded from taxable income, and investment earnings in the account grow tax free. Withdrawals used for qualified medical expenses are also tax free.

Unlike flexible spending accounts (FSAs), HSA funds generally roll over from year to year if they remain unspent. The accounts are also portable, meaning you typically keep your HSA if you change jobs or health plans.

To open an HSA, you must be enrolled in an eligible HDHP. HSAs are typically offered through banks, credit unions, insurance companies, brokerages, or other financial institutions. Annual contribution limits are set by the Internal Revenue Service (IRS) and may change each year.

HSA funds can generally be used to pay for qualified medical expenses, including deductibles, copayments, and certain other health-care costs. Withdrawals used for nonmedical purposes are typically subject to income taxes and, in some cases, additional penalties.

Critics of HSAs argue that the accounts primarily benefit higher-income households that can afford to save more money for medical expenses. Others contend that HSAs may encourage consumers to become more cost-conscious about health-care spending because account holders are directly responsible for managing their funds.