only income tax is paid on the withdrawal and in effect, the account has grown tax-deferred. Medical expenses continue to be tax free. Prior to January 1, 2011, when new rules governing health savings accounts in the Patient Protection and Affordable Care Act went into effect, the penalty for non-qualified withdrawals was 10%. Account holders are required to retain documentation for their qualified medical expenses. Failure to retain and provide documentation could cause the IRS to rule that withdrawals were not for qualified medical expenses and subject the taxpayer to additional penalties. There is no deadline for self-reimbursements of qualified medical expenses incurred after the health savings accounts was established. Health savings account participants can take advantage by paying for medical costs out of pocket and retaining receipts but allowing their accounts to grow tax-free. Money can then be withdrawn years later for any reason up to the value of the receipts. When a person dies, the funds in their health savings account are transferred to the beneficiary named for the account. If the beneficiary is a surviving spouse, the transfer is tax-free. If the beneficiary is not a spouse, the account stops being a health savings account, and the fair market value of the health savings account (less any unreimbursed qualified medical expenses of the decedent paid within the 1 year anniversary of his death) becomes taxable to the beneficiary in the year in which the health savings account owner dies. Compared to medical savings accounts Health savings accounts are similar to medical savings account (MSA) plans that were authorized by the federal government before health savings account plans. Health savings accounts can be used with some high-deductible health plans. Health savings accounts came into being after legislation was signed by President George W. Bush on December 8, 2003. The law went into effect on January 1, 2004. Health savings accounts differ in several ways from medical savings accounts. Perhaps the most significant difference is that employers of all sizes can offer a health savings account and insurance plan to employees. Medical savings accounts were limited to the self-employed and employers with 50 or fewer employees. Benefits The premium for a high-deductible health plan is generally less than the premium for traditional health insurance. A higher deductible lowers the premium because the insurance company no longer pays for routine healthcare, and insurance underwriters believe that Americans who see a