Glossary
Health savings account, defined
A tax-advantaged fund, available only to people enrolled in a qualifying high-deductible medical plan, that can be used to pay deductibles, copays, prescriptions and other eligible expenses. Contributions are deductible, growth is untaxed, and withdrawals for eligible expenses are untaxed.
In practice
The money belongs to the individual, rolls over year to year and moves with them between jobs, which distinguishes it from a flexible spending account. Annual contribution limits are set by the tax code and are higher for family coverage and for people over a certain age. Being enrolled in Medicare, or covered by a spouse's general-purpose flexible spending account, ends eligibility to contribute, though existing balances can still be spent. Withdrawals for anything else are taxed and, before a set age, penalised; after that age they are taxed like retirement income, which makes the balance a supplementary retirement fund if it is invested and left alone. Receipts must be kept, since the account holder is responsible for proving eligibility to the tax authorities.
A worked example
Suppose an employee in a high-deductible plan contributes $3,000 a year through payroll and her employer adds $1,000. In a year with $1,800 of medical bills she pays them from the account and carries $2,200 forward, plus any investment growth. Over a decade of light use the balance can reach the tens of thousands. Hypothetical figures.
Applies to: Health Insurance