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...in premium costs. The health savings account (HSA) grew out of this quest for choice. The HSA was designed as a tax-efficient way for consumers with high-deductible plans to pay for health costs accrued before the insurance kicked in. These high-deductible plans are touted as being more affordable for both employers and consumers--as well as for having the potential to reduce the number of uninsured and underinsured Americans.

In 2003, the Medicare Modernization Act paved the way for expansion of the consumer-directed health plan industry by authorizing the creation of HSAs. These instruments are tax-advantaged accounts for healthcare that combine the benefits of traditional IRAs, Roth IRAs and 401(k) plans. Contributions to HSAs are either tax-deductible or, in the case of an employee, excluded from income. Withdrawals used to pay for qualified medical expenses at any time are tax-free.

Some refer to HSAs as the "tax trifecta" in benefit plans--the tax breaks are available for amounts contributed, earnings within the plan, and upon distribution for qualified medical expenses. The only catch is that HSAs are available only to consumers enrolled in high-deductible health plans (HDHPs), and contributions are limited to a statutory amount. Nonetheless, given the powerful tax benefits, experts estimate that HSAs will be the largest...

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