Before the Affordable Health Care Act was signed into law in 2010, the establishment of health savings accounts, or HSAs, in 2003 had been the most important government foray into the business of health care in nearly 40 years. The idea, championed by a number of people, was for individuals to establish a sort of self-insurance savings account that could be used to pay down medical expenses.
HSAs have some major tax advantages. Each contribution you make is 100 percent tax deductible. When you withdraw from an HSA, all qualified medical expenses are tax free. Moreover, an HSA can move with you from job to job. More importantly, whatever money you don't use in a given year stays in the account, and the money you make on interest and investments is also tax-free and does not have to be reported to the Internal Revenue Service. However, if you withdraw money from the account for nonmedical reasons, the government will tax you 10 percent, along with a 20 percent penalty [sources: HSA Center, CNN and IRS].
Individuals can contribute up to $3,250 each year to an HSA untaxed, while the family contribution cap is $6,450. If you contribute more to the account than the allowable untaxed limit, you'll be hit with a 6 percent excise tax. Many employers provide their workers with HSAs. Those 55 and older can contribute an additional $1,000 [sources: Lee, IRS].
If your employer provides an HSA, your contribution is automatically taken out of your pretaxed wages. Your employer can also contribute toward the account, much in the same way they contribute to employees' 401 (k) accounts. But unlike a 401 (k), family, friends, parents and spouses can pay into your HSA. Your employer's contributions might be excluded from your gross income [sources: Lee, IRS].
You can also open an account on your own with the help of a trustee. You have until April 15 of any given year to put money into your account if you're going to deduct the contribution. When you die, your spouse, if they are named a beneficiary, can then take over your HAS [sources: Lee, IRS].
According to the IRS, to be eligible to participate in an HSA, you have to be enrolled in a high-deductible health plan and not be enrolled in Medicare or claimed as a dependent on someone else's tax return. Your deductible has to be at least $1,100 for one person and $2,200 for a family. You can use the money in your HSA to pay those costs [sources: HSA Center, IRS].