Health Savings Accounts (HSAs) were created in 2003 [by the Medicare Prescription Drug, Improvement, and Modernization Act (MMA)] so that individuals covered by high-deductible health plans [HDHPs] could receive tax-preferred treatment of money saved for medical expenses. Generally, an adult who is covered by a high-deductible health plan (and has no other first-dollar coverage) may establish an HSA.
From U.S. Department of Treasury, http://www.treasury.gov/resource-center/faqs/Taxes/Pages/Health-Savings-Accounts.aspx
HSAs can be used either in the context of individual health insurance coverage or as part of employee health plans. Both individuals and (where an HSA is used in connection with an employee benefit plan) employers can contribute to an HSA. Contributions to an HSA are deductible from the income of the employee as a so-called “above the line” deduction. 26 U.S.C. § 223(a). Contributions by an employer to an employee’s HSA are not considered income to the employee.
Contributions to an HSA (and earnings within the HSA) can be withdrawn tax-free, provided that the funds are used to pay for “qualified medical expenses” as defined by the Internal Revenue Code. 26 U.S.C. § 223(f)(1). Qualified medical expenses include over the counter drugs, but do not include payment for the premiums of the HDHP. 26 U.S.C. § 223(d)(2).
HSAs (unlike [health reimbursement arrangements] HRAs) are owned by the individual – not by the employer. As a result, they are portable. In addition, the funds in the HSA can be carried over from year to year.
Excerpt from Edward F. Shay and James P. Wolf, Consumer Directed Healthcare—Payor and Provider Perspectives, Payors Plans and Managed Care Law Institute (American Health Lawyers Association 2008).
The provision [of the MMA establishing HSAs] builds upon Archer Medical Savings Accounts (MSA’s) authorized in 1996. MSA accounts have been highly restrictive, limiting to 750,000 the number of accounts for small businesses and the self-employed. The HSA provision in [the MMA] has no restriction on the number of accounts and contains fewer eligibility requirements. HSA’s provide a policy step designed to make consumers more conscious of the costs of care and to provide incentive to use services more responsibly.
Excerpt from Cynthia Morton and Elise Smith, The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 Public Law No. 108-13__Provisions of Interest to Long Term Care Residents and Providers, LTC Advisor (American Health Lawyers Association Long Term Care Practice Group Feb. 2004).