Horsfield fired Albion ahead less than 60 seconds after being sent on and then created the clinching goal for Kieran Richardson in the 75th minute.
Albion needed to beat Portsmouth and hope that Norwich City, Crystal Palace and Southampton all failed to win for them to survive. That is exactly what happened and the final whistle led to jubilant scenes as Albion fans spilled on to the pitch.
Albion's survival also created a piece of Premiership history, as they became the first club bottom of the table at the Christmas to survive.
The Baggies were eight points adrift at that stage but manager Bryan Robson sparked an amazing revival in the second half of the season that saw them collect 24 points from the start of the year.
Portsmouth had more than held their own before Horsfield struck but once he did there was only ever going to be one winner.
Albion had to wait until the 58th minute for Horsfield to break the deadlock but Robert Earnshaw wasted a golden chance to ease Albion nerves after just five minutes.
Skipper Kevin Campbell and on-loan Manchester United midfielder Richardson combined to set up the Welsh international. Earnshaw was only six yards from goal but he fired wide under pressure from Arjan De Zeeuw.
It was an opening that needed to be converted because as the half wore on, Albion's nerves started to show and it was Portsmouth who looked the team most likely to score.
The pace of Ricardo Fuller and Diomansy Kamara caused Albion problems.
Fuller used his speed to pull clear of the Albion defence in the 15th minute and latch on to a pass from Gary O'Neil.
But, just like Earnshaw, he failed to hit the target from close range as the presence of Albion defender Martin Albrechtsen forced him to fire wide.
When Portsmouth's rookie striker James Keene forced goalkeeper Tomasz Kuszczak into a smart 20th minute save, the alarm bells were ringing loudly for Albion.
But they managed to overcome the storm and, as the half drew to a close, were able to get a foothold in the game.
Jonathan Greening saw his 25th minute shot deflected for a corner before Campbell was denied by goalkeeper Jamie Ashdown.
Campbell's angled shot looked set to sneak in at the near post only for Ashdown to beat away the shot for a corner.
Zoltan Gera then became the latest Albion player to be frustrated when his spectacular 32nd minute overhead kick was blocked by the well placed De Zeeuw.
But Albion were unable to take that head of steam into the start of the second half and it was Portsmouth who made the early running after the break.
The impressive O'Neil sent over a corner that was headed narrowly wide by Kamara. O'Neil then saw his shot saved by Kuszczak before the dramatic intervention of Horsfield.
Robson took off the ineffective Greening and sent on Horsfield.
Only seconds after his arrival, the former Birmingham City striker found himself unmarked on the left-hand side of the area.
A right-wing cross from Albrechtsen took a slight deflection before finding its way to Horsfield. He wrapped his right foot around the ball and fired in a fierce volley.
Ashdown looked to have collected the ball safely in his hands, but somehow allowed it to roll under his body and into the back of the net in front of the delirious Albion fans in the Birmingham Road stand.
The goal ended Portsmouth's resistance and Richardson made the result safe 15 minutes before full-time when Horsfield turned provider.
Horsfield bustled his way into the area and then back-heeled the ball into the path of Richardson who drilled a low drive beyond Ashdown.