If you're struggling with the high costs of health insurance, a little relief may be only a few days away.

Health savings accounts, created along with the landmark Medicare bill that recently became law, go into effect on Jan. 1.

The savings accounts are sort of a cross between a flexible health-care spending account and a 401(k). As with those accounts, you contribute pretax money.

Like a flex account, you can use the money to pay for most of the costs of health care that your insurance doesn't cover – including some insurance premiums. Unlike a flex account, you invest the money as you see fit, it grows tax free, and you can roll it over from year to year, or to a new job.

The main restrictions for contributing to such accounts are that you must be younger than 65, and you must be enrolled in a health plan with high deductibles.

You'll use the accounts to pay for medical expenses up to your deductible, or for other expenses that aren't covered. Once you meet the deductible, your health policy will cover you for the rest of the year. If you don't meet your deductible, you can roll the extra money over and spend it in the future.

The accounts might be offered by employers, or you can get one on your own.

"Most people are going to get the account at their place of work, and the employer will create a high-deductible plan and deposit money in a health savings account," says John Goodman, president of the National Center for Policy Analysis, a Dallas-based think tank. "The employer will deposit the employer's own money in the account, but the employee may also add some of his own money to the account."

But there's a rub. Because the Medicare law was passed late in the year, very few employers are offering the accounts right away, experts say. Some companies may offer them in mid-2004, but most are expected to offer them in their fall benefits enrollment period, effective in 2005.

That means if you want to take advantage of the accounts as of Jan. 1, you probably will have to contact one of the insurance companies offering them privately.

Early retirees

Some of the major beneficiaries will be people who retire early, before they're eligible for Medicare at age 65. Many people in this situation are getting hammered by the high cost of health insurance for older people.

But if they have a high-deductible policy and start a health savings account, they'll at least be able to deduct from their taxes the amount they contribute.

To start an account in 2004, your policy must have a deductible of at least $1,000 for a single person and $2,000 for a family, and require no more than $5,000 in out-of-pocket expenses for an individual and $10,000 for a family.

Most people can deposit amounts up to their plan deductible, as long as it's no more than $2,600 for individuals and $5,150 for a family. All these figures will rise with inflation.

But people between 55 and 64 years old can make additional catch-up contributions. In 2004, consumers in that age group may contribute an additional $500. The amount increases by $100 each year, up to $1,000 per year in 2009 and thereafter.

Say you're single, 55 years old, your health insurance deductible is $2,000, and you're in the 28 percent tax bracket. You can contribute $2,500 to a health savings account in 2004 and deduct that amount from your taxes, for an annual savings of $700.

"It is an ideal vehicle for people to save for retiree health care expenses once they've reached retirement age but before age 65," says Phil Curran, senior manager in the Human Resources Practice of accounting firm PricewaterhouseCoopers LLP in Dallas .

For many early retirees, it may turn out to be an account that resets every year, he says.

"It depends on what their individual expenses are. It may be what they're putting in matches what is coming out."

If you wait too late to start the account, though, you might not get reimbursed for all your health expenditures in 2004. The government hasn't finalized the rules on exactly how the accounts will work, Mr. Curran says, but he assumes that you won't be able to make withdrawals for expenses incurred before the account was opened.

However, any amount unspent will remain in the account to be used in later years.

Young people's advantage

Younger people have an even greater opportunity. Say you're a healthy 25-year-old whose last worry is medical bills. As in retirement planning, the best thing you have going for you is the long time you have to accumulate savings. Also, young people generally have fewer serious health problems than older people, so they can let the savings build up.

Here's how the accounts will work over the long term.

Earnings in the accounts grow tax free, and you don't pay tax on withdrawals as long as you use them for medical expenses. You can use the accounts to pay for premiums for long-term care insurance, Medigap coverage, premiums for employer health insurance that you're entitled to continue on your own if you lose your job, and your share of premiums for employer-provided retiree health coverage, Mr. Curran says.

Before age 65, if you use the money for nonmedical expenses, you have to pay tax on what you take out, plus a 10 percent penalty.

"After you turn age 65, they eliminate that 10 percent penalty and the money is taxed as normal income when you take it out for nonmedical purposes," Mr. Curran says. "They also waive that 10 percent penalty before age 65 in the event of disability."

When you die, your account can transfer to your spouse tax free.

The savings accounts could spell good news for Eloise Bolt, although she didn't know they had been created. Ms. Bolt, 56, a retiree from TXU Corp., is paying through the nose for health insurance for her and her 40-year-old husband, a situation that has forced her to take on two jobs.

"That's something I could think about," says Ms. Bolt, of North Richland Hills, who pays $659 a month for health insurance, with that amount due to rise to $725 a month in January. "I'm sure it's not going to go down. Anything I can do to help prepare for the future of it going up would be something really nice to look at."

How to invest

Because money in a health savings account can be invested like a 401(k) or individual retirement account, you should carve out an investment strategy for your account just as you would for one of those accounts, balancing risks vs. rewards.

"The more liquid assets you have outside of this, the more aggressive you can be in that account," says Tom Dwyer, a certified financial planner at Financial Design Group in Addison . "If you don't have much outside, you might want to be more conservative on this so you can be sure the money is there when you need it."

In other words, don't invest all the money in risky high-tech stocks.

A major consideration is when you expect to use the money for medical bills.

"The sooner you're going to need the money, it makes less sense to take additional risk," says Michael Busch, a certified financial planner and president of Vogel Financial Advisors LLC in Dallas . "People may fund it for more than they anticipate that they'll need, just because they like the savings vehicle and the tax deferral.