What is a Health Savings Account?

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  • Written By: Mary Elizabeth
  • Edited By: Bronwyn Harris
  • Last Modified Date: 03 September 2019
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A Health Savings Account (HSA) is a savings account that helps individuals save for health care expenses for themselves, their spouses, and their dependent children. Though there had been similar concepts previously, the Health Savings Account is a specifically American concept. In Canada, for example, the model is a Tax-Free Savings Account that can be used for many purposes, rather than there being a separate and distinct health care account. A Health Savings Account can be opened at a bank, credit union, insurance company, and other companies that have been approved.

The HSA officially came into being in December 2003 when President Bush signed the “Medicare Prescription Drug, Improvement and Modernization Act of 2003” into law. The account is owned by the individual who creates it and can be used for both current and future health care expenses and helps create protection from unexpected or high medical bills. There are certain favorable tax privileges associated with an HSA, but using the moneys for purposes other than qualified medical expenses makes the amount taxable as income and adds a penalty tax.


There are several qualifications for having a Health Savings Account. One must be an adult and be covered by a High Deductible Health Plan (HDHP) that is HSA-qualified. One must not have any alternative first-dollar medical coverage, although insurance for accident, injury, dental care, vision care, disability, and long-term care are excepted, and one may hold any or all of these simultaneously with an HSA. In addition, one cannot yet be enrolled in Medicare, and one cannot be claimed as a dependent on another person’s tax return.

There are also several limitations on one’s Health Savings Account. Although contributions bay be made by an individual, the individual’s employer, or both, the total contribution is limited annually and must cease once the individual is enrolled in Medicare. However, the money in the account can be used to pay not only for nearly all medical care and services and dental care and vision care but also over-the-counter drugs, including simple things like aspirin.

Creating a Health Savings Account will save some people money on their health care by significantly lowering their health insurance premium. The money can be invested and earn income. The tax savings occur in three ways: tax deductions upon contributions made to the account; tax-free investment earnings; and tax-free withdrawals for qualified expenses.


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