The Health Savings Account (HSA) was created in Medicare legislation signed into law in December 2003. It is a financial account, used in conjunction with qualified high deductible health plans (QHDHP), owned by an individual in which contributions to the account are used to pay for current and future qualified medical expenses. Contributions to an HSA can be made by the employer or the individual, or both. If the employer makes a contribution, it is not taxable to the employee. If the individual contributes, through a salary reduction arrangement the dollars used will be pre tax.

The funds may be used to pay for qualified medical expenses of account owners and their spouse and dependents as long as they are dependents on the owner’s tax return. In addition to the usual and customary healthcare costs usually covered by insurance, HSA funds can be used to pay for wellness benefits, over-the-counter and prescription drugs, COBRA premium payments, health insurance premiums for individuals receiving unemployment compensation, qualified long-term care, and Medicare and retiree health insurance premiums.

An HSA belongs to the employees and is completely portable, so they can take it with them from one job to the next. Also, no “use it or lose it” rules apply to the account, as is the case with other types of plans. All funds in the HSA are fully vested, unspent balances remain in the account until spent, and the account can grow through investment earnings, just like an IRA.