Health savings accounts and other account-based health plans.

• This Issue Brief examines accounts that can be used to pay for health care services on a tax-favored basis. Starting with health savings accounts (HSAs), the function of these accounts is described, followed by a discussion of issues related to the accounts, whether expectations for the accounts will be met, and recent evidence on their impact. • HSAs are now one of a handful of accounts that individuals can use to pay for health care services on a tax-favored basis. Flexible spending accounts (FSAs) have been available since the 1970s, while Archer Medical Savings Accounts (MSAs) have been available since 1996. Some employers also offer health reimbursement arrangements (HRAs). • An HSA is a tax-exempt trust or custodial account that an individual can use to pay for health care expenses. Contributions to the account are deductible from taxable income and distributions for qualified medical expenses are not counted in taxable income. Tax-free distributions are also allowed for certain premiums. There is no use-it-or-lose-it rule associated with HSAs, as there is with FSAs. In order to make tax-free contributions to an HSA, an individual must be covered by a health plan that has an annual deductible of not less than $1,000 for self-only coverage and $2,000 for family coverage.