Final answer:
An Health Savings Account (HSA) allows employees to save pre-tax dollars for future medical expenses, reducing their overall taxable income and offering potential tax savings. HSAs are portable and work in conjunction with high-deductible health plans (HDHPs), differing from fee-for-service and HMO payment structures.
Step-by-step explanation:
An Health Savings Account (HSA) is a type of savings account that allows employees to contribute funds on a pre-tax basis for medical expenses. The feature of pre-tax deduction means funds are subtracted from an employee's income before taxation is applied, reducing their taxable income. The HSA can be used to pay for qualified healthcare expenses, which include deductibles, copayments, coinsurance, and some other expenses. HSAs are often paired with high-deductible health plans (HDHPs).
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For an employee participating in an HSA, the contributions are made through payroll deductions and may result in significant tax savings. Importantly, because the money paid into the HSA is pre-tax, it lowers the amount of income tax the employee owes at the end of the year. Moreover, HSAs are "portable," meaning they remain with employees even if they change jobs, unlike other employer-sponsored health plans.
This arrangement contrasts with a fee-for-service approach, where medical care providers bill per service rendered, or with an Health Maintenance Organization (HMO), where an organization receives a fixed fee per enrollee.