Health Savings Accounts

Health Savings Accounts, or HSAs, let individuals set aside pre-tax dollars for medical expenses when paired with a high-deductible health plan. They were created in 2003 and are a favored vehicle for consumer-driven healthcare reform.

Health Savings Accounts were created by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. The basic idea is straightforward. A worker with a qualifying high-deductible health plan can deposit pre-tax money into an HSA, use those funds to pay for medical care, and let any unused balance roll over from year to year. The account belongs to the individual and travels from job to job. Contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are also tax-free. After age 65, HSA funds can be used for non-medical purposes with the same tax treatment as a traditional IRA. Supporters argue that HSAs restore the price signal that has been missing from American healthcare since employer-sponsored insurance became dominant. When patients spend their own money on routine care, they ask about prices, compare options, and make healthier choices. HSAs also give workers a portable savings vehicle that does not depend on staying with one employer or qualifying for Medicare. Critics argue that HSAs disproportionately benefit high earners, who have more to deposit and more reason to use the tax shelter. High-deductible plans can also discourage low-income families from seeking needed care. The accounts have grown steadily in popularity but remain a small share of total healthcare financing.