Health savings accounts (HSAs) grew from 438,000 participants in September of 2004 to 6.1 million by the end of 2008, according to America's Health Insurance Plans (AHIP), a national association of health insurers in Washington. The more than 1,200% rise makes sense to Scott Hanson, a principal with Hanson McClain Advisors of Sacramento, Calif. 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 HSA. "I look at it as a second [individual retirement account] contribution," Hanson says.

Although their primary purpose is to pre-fund high healthcare insurance deductibles, HSAs resemble IRAs in that participants can shelter income from federal taxes—up to $3,000 per 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 an HSA 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 healthcare plan. The deductibles in these plans mostly range from $2,500 to $3,000, according to AHIP. Funds can be withdrawn without penalty for designated medical expenses. Funds withdrawn for nonmedical purposes are subject to income tax and a 10% penalty.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—participants used to have 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 GAO. Because HSAs have only been available in their current form since 2004, balances are still relatively small. As of Jan. 31, HSAs held a total of $9.1 billion in assets, according to a study by Information Strategies of New York. As of Jan. 31, 94% 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.

Stuck in Low Gear

HSAs' growth has been far slower than industry analysts initially predicted. Financial Research Corp. (FRC) of Boston originally projected that HSAs would have 50 million participants by next year. Now FRC 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 GAO.

One of the impediments to greater participation in HSAs is getting people to understand how they work, and advisors typically aren't the ones to explain all the benefits, says Kevin Timmerman, principal of Steele Capital Management in Dubuque, Iowa. The layers of HSA complexity are huge hurdles for advisors to overcome in convincing clients to use them, whether as employees or as business owners. Hanson says none of his clients use HSAs, and Thomas Joyce, a principal with Joyce Financial Management in Sebastopol, Calif., says only one of his clients uses an HSA.

On the plus side, HSAs became much easier to use in the past couple of years, says 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 says. 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.

In Jeopardy?

Everything related to healthcare is open to scrutiny in Washington now, and HSAs could conceivably change. "They may be a target, and that's a concern," says Diane Boyle, executive vice president 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, reports the GAO.

Still, HSAs will almost certainly survive any healthcare overhaul, predicts Luis Fleites, director of retirement industry research for FRC. "Lawmakers' key concerns are affordability and costs, and HSAs are a way to rein them in," he says, partly because people become more astute healthcare consumers when they're spending from their own pockets. "Congress might change the name of HSAs, but the elements will still be there." Fleites adds that with a nudge from his cost-conscious employer, he enrolled in a high-deductible health plan with an HSA this year, and his monthly premiums dropped from $500 to $160.

Now Fleites believes that what happened to him will play out nationally. "Economic instability may push the adoption of high-deductible health plans, which in turn will drive HSA participation," he says. 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 healthcare is high on the list," Fleites says.