What is a Health Savings Account?

A Health Savings Account (HSA) is a tax-advantaged spending and savings account that can be used to pay qualified medical expenses. (It is sometimes anecdotally referred to as a medical 401k.) It takes two components to create an HSA-based health coverage plan:

1. An HSA-eligible health plan
2. Health Savings Account (HSA)

The HSA-eligible health plan is the insurance component. It provides medical coverage for you and your family in case of emergency, major illness, or high annual health care costs. It has a deductible that is higher than in a traditional insurance plan, but HSA-eligible plans feature significantly lower premiums.

The HSA is funded by pre-tax contributions from you, your employer or both. In 2007, the maximum set by the IRS for an individual is $2,850 and the maximum contribution for family coverage is $5,650.  In 2008, the maximum set by the IRS for an individual is $2,900 and the maximum contribution for family coverage is $5,800. You can save this much even if your health plan deductible is lower. These rates are subject to change every year, adjusted for inflation.