Health savings accounts' popularity is growing, but their complexity is hindering their broader use as a tax-deferred investment vehicle.

HSAs went from 438,000 participants in September 2004 to 6.1 million by the end of 2008, according to the trade group America's Health Insurance Plans.

That increase makes sense to Scott Hanson, a principal with Hanson McClain Advisors of Sacramento. He dropped his company's traditional health plan to use a high-deductible plan and saved nearly $600 a month in premiums, much of which he puts in the plan's accompanying health savings accounts.

"I look at it as a second IRA contribution," Hanson said.

Though their primary purpose is to pre-fund high health-care insurance deductibles, HSAs resemble individual retirement accounts in that participants can shelter income from federal taxes — up to $3,000 a year for an individual and $5,950 for a family (there is also a catch-up provision of $1,000 annually for people 55 or older).

Unlike flexible spending accounts, leftover money in a health savings account is not lost, but instead can accumulate indefinitely. The catch: A person or family can only open an HSA as an adjunct to a high-deductible health-care plan. The deductibles in these plans mostly range from $2,500 to $3,000, according to America's Health Insurance Plans.

Funds can be withdrawn without penalty for designated medical expenses. Funds withdrawn for nonmedical purposes are subject to income tax and a 10% penalty. Withdrawals from HSAs are made using a debit card issued by a bank trustee for the insurance company that underwrites the high-deductible health plan. This is a new development; previously participants had to submit every receipt to an administrator for reimbursement.

Individuals contributed $754 million nationally to HSAs in 2005 and withdrew $360 million, according to the Government Accountability Office.

Because HSAs have only been available in their current form since 2004, balances are still relatively small. As of Jan. 31, HSAs held $9.1 billion of assets, according to a study by Information Strategies of New York. Ninety-four percent of HSA assets were in cash and the remaining 6% in securities, according to Devenir, a Minneapolis broker-dealer that handles about half the HSAs in the United States.

Health savings accounts have grown far slower than industry analysts initially predicted. Financial Research Corp. originally projected that HSAs would have 50 million participants by next year. Now the Boston firm projects that there will be 10 million HSA participants by the end of 2009. There were 202 million Americans using private health plans in 2005, according to the Government Accountability Office.

People are unclear about how HSAs work, and advisers typically aren't the ones to explain all the benefits, said Kevin Timmerman, principal of Steele Capital Management Inc. in Dubuque, Iowa.

And since people find HSAs hard to grasp, advisers find them a hard sell with employees and business owners alike: Hanson said none of his clients use HSAs, and Thomas Joyce, a principal with Joyce Financial Management in Sebastopol, Calif., said that only one of his clients uses an HSA.

On the plus side, HSAs became much easier to use in the past couple of years, said Judy Joyce, a principal of Joyce Financial Management. She was loath to recommend HSAs until insurance companies came out with the new debit card system. "Now I like HSAs very much," she said. But Hanson never uses his HSA debit card. Instead, he pays medical bills out of pocket to avoid spending the tax-sheltered dollars in his HSA.

Everything related to health care is open to scrutiny in Washington now, and HSAs could conceivably change. "They may be a target, and that's a concern," said Diane Boyle, EVP of the Association of Health Insurance Advisors in Falls Church, Va. Critics say that HSAs only work effectively for healthy people and that only wealthy people use them. Indeed, the average gross income of an HSA user was $139,000, versus $57,000 for all other income tax filers, according to the GAO.

Still, HSAs will almost certainly survive any health-care overhaul, said Luis Fleites, Financial Research's director of retirement industry research.

"Lawmakers' key concerns are affordability and costs, and HSAs are a way to rein them in" — and people become more astute about health care when they are spending from their own pockets, Fleites said. "Congress might change the name of HSAs, but the elements will still be there," he said.

With a nudge from his cost-conscious employer, Fleites enrolled in a high-deductible health plan with an HSA this year, and his monthly premiums dropped from $500 to $160.

He believes that what happened to him will play out nationally, he said. "Economic instability may push the adoption of high-deductible health plans, which in turn will drive HSA participation."

Company actions will prove pivotal. In 2008, 75% of individuals with HSAs were in group markets. "Companies are trying to cut costs where they can, and health care is high on the list," Fleites said.

Brooke Southall is a freelance writer for Financial Planning.

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