A Health Savings Account (HSA) is a savings product that offers a different way to pay for healthcare. HSAs enable participants to pay for current health expenses and save for future qualified medical and retiree health expenses on a tax-free basis.

Only those enrolled in a qualifying High Deductible Health Plan (HDHP) can take advantage of HSAs. The best part about an HSA is that the participant owns and controls the money in the HSA, without any third-party or health insurer telling them how to use it.

HSA participants enjoy several benefits, including:

• They can claim a tax deduction for post-tax contributions.
• Contributions to the HSA made by an employer (including contributions made through a cafeteria plan) may be excluded from the participant’s gross income.
• The contributions remain in the HSA from year to year until they are used.
• The interest or other earnings on the assets in the HSA are tax free.
• Distributions may be tax free if they are used to pay for qualified medical expenses.
• An HSA is “portable” so it stays with the participant if they change employers or leave the workforce altogether.

HSA funds can pay for any “qualified medical expense,” even if the expense is not covered by the HDHP. For example, most health insurance does not cover the cost of over-the-counter medicines, but HSAs can. HSA rules state that If the money from the HSA is used for qualified medical expenses, then the money spent is tax-free.

For a definitive list of “qualified medical expenses”, please refer to the HSA Rules in IRS Publication 969 – available at http://www.irs.gov.

If the money is used for items other than qualified medical expenses, the expenditure will be taxed and, for individuals who are under age 65, subject to a 20% tax penalty.

According to HSA rules, any eligible individual can contribute to an HSA. For an employee's HSA, the employee, the employee's employer, or both may contribute to the employee's HSA in the same year. For an HSA established by a self-employed (or unemployed) individual, the individual can contribute. Family members or any other person may also make contributions on behalf of an eligible individual.