Health Savings Accounts (HSAs) are one way people can pay for unreimbursed medical expenses (deductibles, copayments, and services not covered by insurance) on a tax-advantaged basis. HSAs can be established and funded by eligible individuals when they have a qualifying high-deductible health plan (HDHP, i.e., high-deductible insurance) with a deductible in 2012 of at least $1,200 for self-only coverage and $2,400 for family coverage. Qualifying HDHPs must also limit out-of-pocket expenses for covered benefits to certain amounts. With some exceptions, eligible individuals cannot have other health insurance coverage. HSA tax advantages can be significant for some people: contributions are deductible (or excluded from income that is taxable if made by employers), withdrawals are not taxed if used for medical expenses, and account earnings are tax-exempt. Unused balances may accumulate without limit. HSAs were first authorized in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA, P.L. 108-173 ). However, other tax-advantaged accounts for health care expenses have existed for some time. Flexible Spending Accounts (FSAs), which many employees can use, began spreading in the 1980s once the Internal Revenue Service (IRS) established clear guidelines. Archer Medical Savings Accounts (MSAs), a precursor of HSAs, became available for a limited number of people starting in 1997. Health Reimbursement Accounts (HRAs), made available by some employers, were approved for tax-exempt status in 2002. For an overview of the similarities and differences of these accounts, see CRS Report RS21573, Tax-Advantaged Accounts for Health Care Expenses: Side-by-Side Comparison , by [author name scrubbed]. Also see Internal Revenue Service publication 969, Health Savings Accounts and Other Tax-Favored Health Plans. When coupled with high-deductible health plans, these accounts are part of what some call "consumer-driven health plans." One objective of these plans is to encourage individuals and families to set money aside for their health care expenses. Another is to give them a financial incentive for spending health care dollars prudently. Still another goal is to give them the means to pay for health care services of their own choosing, without constraint by insurers or employers. Since HSAs are still relatively new, the extent to which they will further these objectives is not yet known with any assurance, notwithstanding some early data. However, many individuals and employers are interested in HSAs, and additional information about them is emerging continuall. This report provides a summary of the principal rules governing HSAs, covering such matters as eligibility, qualifying health insurance, contributions, and withdrawals. It will be updated as the rules change, either by legislation or regulatory action. Rules governing HSAs are laid out primarily in Section 223 of the Internal Revenue Code and guidance issued by the Department of the Treasury and the IRS. Section 223 of the Code was enacted by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 ( P.L. 108-173 , Section 1201(a)). The section has been amended three times: first by the Gulf Opportunity Zone Act of 2005 ( P.L. 109-135 , Section 404(c)); second by the Tax Relief and Health Care Act of 2006 ( P.L. 109-432 ); and finally by the Patient Protection and Affordable Care Act (PPACA; P.L. 111-148 ). HSAs are affected by other rules as well. For example, whether an expenditure is a qualified medical expense is governed by Section 213(d) of the Internal Revenue Code and IRS guidance on it; aside from exceptions pertaining to the purchase of health insurance, Section 223 does not change these rules. The summaries of the principal HSA rules that follow do not provide all details or cite supporting documentation. Further information might be obtained by referring to the statutory provisions cited above, to IRS and other government publications, or to a growing body of secondary analyses. An HSA is a tax-exempt trust or custodial account established for paying qualified medical expenses of the account beneficiary. Accounts may be established with banks and insurance companies or with other entities approved by the IRS to hold Individual Retirement Accounts (IRAs) or MSAs. In addition, other entities may request approval to be an HSA trustee or custodian. Insurance companies that offer qualified high-deductible health plans (HDHPs) often also establish HSAs for the policyholders. However, there is no federal requirement that HSAs be established by the entity that provides the health plan. Individuals interested in establishing an HSA must locate an entity that accepts the accounts; they cannot simply deem an ordinary savings account to be an HSA. Individuals are eligible to establish and contribute to an HSA if they have a qualifying HDHP and no disqualifying coverage, as discussed under the next two headings. Whether someone has a qualifying HDHP is determined as of the first of each month; thus, a person might be eligible to contribute to an HSA in some months but not others. For example, if someone first enrolled in an HDHP on September 15, their HSA eligibility period would begin on October 1 of that year. Individuals cannot be enrolled in Medicare (a form of disqualifying coverage), which generally occurs at age 65. They cannot have received Veterans Administration medical benefits (another form of disqualifying coverage) within the past three months, other than benefits for preventive care or from disregarded coverage (for the latter, see exceptions to disqualifying coverage in the section on " What Is Disqualifying Coverage? "). On the other hand, individuals can be eligible even if they have access to free or reduced price health services at an on-site employer clinic, provided the clinic does not offer significant benefits. Individuals are not eligible if they may be claimed as a dependent on another person's tax return. Tax dependency is determined on a yearly basis; this might not be known until the end of the year. Individuals may keep their HSAs once they become ineligible. Thus, individuals do not lose their HSA (or the right to access it) by turning age 65 or by obtaining insurance with a low deductible. However, they could not make contributions until they become eligible once again. Individual members of a family may have their own HSAs, provided they each meet the eligibility rules just described. They can also be covered through the HSA of someone else in the family; for example, a husband may use his HSA to pay expenses of his spouse whether or not she has qualifying coverage and whether or not she has her own HSA. The husband might use his HSA to pay the spouse's expenses even if she has disqualifying coverage. Individuals may have more than one HSA account. A health plan must meet several tests to be qualified: it must have a deductible above a certain minimum level, and it must limit out-of-pocket expenditures for covered benefits to no more than a certain maximum level. These two tests are described immediately below. In addition, a qualifying health plan must provide general coverage: substantially all of its coverage cannot be through what the statute calls "permitted insurance" (e.g., coverage for only a particular disease) or certain other coverage (e.g., vision care). This rule prevents individuals from making HSA contributions when the only insurance they have is high-deductible coverage for a narrow class of benefits. (More details on permitted insurance and these other forms of coverage are provided under the heading " What Is Disqualifying Coverage? ".) For self-only coverage, the annual deductible in 2012 must be at least $1,200; for family coverage, it must be at least $2,400. These amounts will be adjusted for inflation (rounded to the nearest $50) in future years. Only usual, customary, and reasonable charges for covered benefits are taken into account in determining whether deductibles are met. Premiums are not included in meeting the deductible, though copayments may be at the option of the HDHP. The minimum deductible requirement does not apply to preventive care. The exception is established in the statutory language, which does not define the term. However, IRS regulations provide that preventive care includes but is not limited to periodic health evaluations (including tests and diagnostic procedures ordered in connection with routine examinations), routine prenatal and well-child care, immunizations, tobacco cessation programs, obesity weight-loss programs, and various screening services. Drugs and medications can be included when taken by a person who has developed risk factors for a disease, or to prevent its recurrence. In general, preventive care does not include services or benefits intended to treat existing illnesses, injuries, or conditions; an exception is allowed when the treatment is incidental to the preventive care service and it would be unreasonable or impracticable to perform another service. Prescription drugs are not exempt from the minimum deductible, whether they are treated like other benefits in the high-deductible insurance plan or have different deductibles and copayment requirements. Prescription or other discount cards do not disqualify individuals from meeting the minimum deductible requirement. Similarly, individuals are not disqualified by coverage under an employee assistance program, disease management program, or wellness program, provided the program does not provide significant benefits in the nature of medical care or treatment. For self-only coverage, the annual limit on out-of-pocket expenditures for covered benefits must not exceed $6,050 in 2012. For family policies, the limit must not exceed $12,100. These amounts will be adjusted for inflation (rounded to the nearest $50) in future years. These limits should not be interpreted as ceilings on all out-of-pocket expenditures for health care.