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Health Savings Accounts or HSAs came into existence with the signing of legislation in 2003. HSAs have grown in size since then numbering almost 3 million individual accounts.

Health Savings Accounts

ACS | Mellon HSA Solution who now manages more than 450,000 health savings accounts (HSAs) attributes the growth in these "accounts to the broad flexibility it offers employers in enrollment, funding, communication, and investments."

Unlike MSAs, FSAs, (flexible savings accounts funded with pretax dollars but with a nasty little "use it or lose it" clause - which has the net effect of low employee contributions to the plan) or HRAs (health reimbursement accounts which does not allow participants to carry forward unused balances or use the money for deductibles), HSAs, supposedly fixed many of those problems.

The basics of these plans are different as well.

You must be covered by a high deductible plan or HDHP. That means more initial out-of-pocket expense. The plan can be either individual or provide coverage for your family.
If you become eligible for a plan that is not come with a high deductible, you may not participate in the HSA. Check with your tax person if you have a FSA or HRA.
You must be younger than 65 years old.
Dependents may not have an HSA of their own.

How much can you deduct?

The annual contribution limit on deductions for the 2008 calendar year is $2,900 for an individual with self-only coverage under a high deductible health plan and $5,800 for an individual with family coverage.

A "high deductible health plan" has an annual deductible of at least $1,100 for self-only coverage or $2,200 for family coverage, and with annual out-of-pocket expenses up to $5,600 for self-only coverage or $11,200 for family coverage.

2008 Contribution Limit - Individual: $2,900

Contribution Limit - Family: $5,800

Minimum Annual Deductible 2008
Maximum Out-of-Pocket Expenses for 2008

Individual:$5,600
Family: $11,200

The Drawbacks

According to J. Geisel, ÒGovernment HSA Guidance Expected to Answer Key Questions, Boost Use,Ó Business Insurance, June 2004, HSA is money is available for withdrawal for non-medical purposes. Employers who contribute to these kinds of plans may see those contributions withdrawn as the employee rationalizes the 10% penalty and tax implications as worthwhile.

These plans are also a huge tax hassle with rules that are difficult to understand.

The plans are based solely on a cash transaction, disallowing any stock or stock fund asset transfers into the account. The exception to this rule is a rollover from a MSA or other HSA plan.

These plans are not what they appear to be for many people. There have been criticisms of the plans because they can, for the very wealthy, resemble tax shelters disguised as health insurance. They are funded with discretionary cash and because of the high deductible insurance required for eligibility, many people are excluded.

The one beneficiary is the employer. They enjoy lower costs and health expenditures. It may on the surface appear to be a generous offer from your employer, one that offers tax benefits, but the bottom line is your health and how much you might access the plan.

What are MSAs?