If you choose a High Deductible Health Care Plan (HDHP) for your health insurance plan, you probably have the option of adding a Health Savings Account (HSA).

What Is An HSA Account?

A Health Savings Account is a way to save pre-tax money to pay for qualified medical expenses.  It was introduced in 2003 by federal legislation.

You must be enrolled in an HDHP to contribute to an HSA.  The federal government limits how much you can contribute each year, based mostly on what level of coverage you have.  The current limits are

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You can contribute an additional $1,000 per year if you are age 55 or older.

Your employer will take deductions from your paychecks based on what you elect for the year and will place the funds in a bank account. Some employers also contribute to the HSA on your behalf.

HSA vs. FSA

So far, the HSA probably sounds a lot like a Flexible Spending Account (FSA), and there are a number of similarities between the two plan types. But there are also several important differences.

1.  Eligibility

As mentioned, you must be enrolled in an HDHP in order to make contributions to an HSA. With FSA plans, anybody who meets the eligibility requirements set by your employer can contribute to an account.

Additionally, you can’t have any other non-HDHP medical coverage, including Medicare.

2.  Limits

The only limit currently on FSA contributions is the one your employer sets (this will change in 2013).  As shown above, the government already limits HSA contributions.

3.  Use-It-Or-Lose-It

One of the biggest differences between the two plan types is the fact that your unused HSA contributions roll over from year to year.  Unlike with the FSA, you are not faced with losing unused funds, and the balance can grow.

4.  Eligible Expenses

There’s almost no difference between the FSA and HSA in this area.  The main one is that you can use HSA, but not FSA, funds to pay for non-employer medical insurance.  Common examples include premiums for long-term care insurance or for Medicare.

If you change from the HDHP to another medical plan – including Medicare – you must stop your HSA contributions.  But you can continue to use any remaining balance for qualified medical expenses.

5.  Paperwork

Both plan types require a fair amount of record keeping.  If you have an HSA, however, you must file form 8889 with your taxes.  For the moment, at least, you don’t have to report anything about your FSA.

How To Use An HSA

Your HSA dollars will be deposited in a bank account.  Depending on the options available, it might be a checking account or some other account type. The money is under your control once it’s in the account. You are responsible for making sure you spend it on eligible medical expenses.

If your HSA is a checking account, for example, you can write a check from the available funds to pay for medical services. Some accounts come with a debit card that you can use for things such as prescriptions.

If you spend the money on non-eligible expenses, you will have to pay income tax on the amount as well as a penalty.

Have you used an HSA with your High Deductible Health Care Plan? How has it worked for you?