Health savings accounts (HSAs) have many supporters among financial planners. "HSAs can be better than a Roth IRA," says Helen Huntley of Holifield Huntley Financial Advisers in St. Petersburg, Fla. "Tax-deductible contributions and tax-free withdrawals are a pretty unbeatable combination."

An HSA pairs a high-deductible insurance plan with a tax-free savings account that the insured can use for health expenses now, or save or invest for a later date or retirement. As Huntley mentioned, it offers big tax savings: The money contributed to the account is tax deductible, it grows tax-free and certain withdrawals are tax-free if they are for qualified medical expenses. This year's maximum tax-deductible contributions are $3,050 for individuals, $6,150 for families and $7,150 for people 55 or older buying family coverage.

Although HSAs were barely mentioned during last year's health insurance discussion, they appear to be gaining in popularity. In February 2010, JPMorgan Chase reported that its HSA business had grown by 30% over the past year, adding more than 115,000 accounts and $220 million in deposits. "I believe we are on par with or a little bit ahead of the industry," says David Josephs, a managing director who oversees the Chase HSA.

At Chase, a great deal of the growth came via HSAs offered through employers. But individuals have been switching to HSAs too.

The majority of buyers are choosing high-deductible policies that qualify for HSAs, according to eHealthInsurance and HSA for America, two firms that focus on individual and family health coverage. "Premiums are lower than for traditional health insurance," says Sam Gibbs, senior vice president of sales at eHealthInsurance Services in Mountain View, Calif. "Some of our new business comes from people who have lost jobs and find these arrangements are better than continuing coverage under COBRA, which can be very expensive."

Growth can cause growing pains, though, and HSAs are no exception. They are complicated products, and planners who suggest them to clients should consider the following issues before making any recommendations.

RIGHT CLIENT?

"The biggest drawback to HSAs is educating clients about them," says Kathleen Campbell, a financial planner in Fort Myers, Fla. "It's hard to get clients to understand the ins and outs of HSAs, and why they would benefit from them."

In order to open an HSA, a client must have a health insurance policy that meets certain requirements, including a high deductible. The high deductible decreases the premium, but increases the client's exposure to out-of-pocket costs. According to eHealthInsurance, the average monthly premium for its HSA-eligible insurance is $143 for individual coverage, which pays for a policy with a deductible of $3,382. For family coverage, the average premium is $331 a month, which pays for a policy with a deductible of $5,612, on average. Such coverage might be right for some clients but not others.

"We have used HSAs with several companies where the plans didn't work," says Doug Neal, a planner in Houston. "Those clients' companies had many employees with families. Young children go to the doctor all the time, and the HSA was depleted very early in the year. The families were not used to having to pay the full freight." Neal adds that one company had employees all over Texas, which made it hard to use the network.

Neal is much more upbeat about his firm's experience. "Our HSA plan works well, because most of our people are in their fifties or sixties, with kids who are grown," he says. "The usual expense is the annual physical. We save approximately $250 per month per person on medical costs."

Richard Imbrey, a financial planner in Knoxville, Tenn., says HSAs have been successful for most of his clients, but there have been some startup concerns. Imbrey generally recommends that clients make large deposits into the HSA account in the first year, so that the account has enough funds in it to cover reimbursements: "If an account doesn't have enough to cover a deductible, you can still deposit a lump sum into it up to the maximum limit so that the claims are paid with pretax dollars. But it's easier to fund the accounts on a monthly basis." Imbrey adds that if the plan offers a debit card clients can use for co-pays at the doctors' office, it simplifies reimbursements from the HSA.

RIGHT PROVIDER?

If coverage is offered at work, the employer often suggests one or more HSA providers. "Some employers have undesirable choices for the HSAs they offer their employees," says Connie Stone, president of Stepping Stone Financial in Chagrin Falls, Ohio. "They usually have a bank option that pays very little and mutual funds that may have high expenses." Stone prefers several good options, so some money can be kept liquid in case an employee needs to pay medical expenses now, and the rest can accumulate returns in mutual funds for later use.