Your Money Adviser: This special, tax-favored account allows you to contribute money pretax from your paycheck, let it grow tax-free and withdraw it tax-free to pay for eligible medical expenses.

Share story

January signals the start of different health benefits for many people, based on the coverage they chose during open enrollment. Increasingly, consumers are enrolling in health plans that work with special health savings accounts. Here is some help in understanding how to use them.

A health savings account is a special, tax-favored account. You can contribute money pretax from your paycheck, let it grow tax-free and withdraw it tax-free to pay for eligible medical expenses. If you change jobs, the account remains with you. (The accounts work differently from flexible health care spending accounts, which don’t follow employees if they change jobs.)

The accounts must be used with specific kinds of health plans that have a high deductible (at least $1,300 for an individual for 2016). As higher deductibles become more common, however, health savings accounts are becoming more widespread. As of the middle of last year, 14.5 million health savings accounts held more than $28 billion in assets, according to Devenir, which tracks the accounts.

A health savings account can be used two ways: first, as a spending account for immediate medical costs, and second — if you can afford not to use the money in the short term — as a way to save for longer-term health care needs. Some accounts let you invest funds, similar to a 401(k) retirement plan, once your balance reaches a certain level.

Most health savings accounts offer debit cards to make spending and record-keeping more convenient. So consumers who have signed up for an account but have not yet received a card should contact their health plan or account administrator.

Stephen Neeleman, founder and vice chairman of HealthEquity, a health savings account manager, advised new users to deposit money in their account as soon as possible — even if it is just a small amount — to make sure the account is officially open. You can always deposit more money later, after the account is established. “With an HSA, you can fund it anytime during the year, or even up until tax day of the next year,” he said.

It may take time to build the account, so if you incur medical bills in the meantime that exceed your balance, you must pay the difference with other money. That is one reason health savings account plans can be challenging for people with lower incomes, even though the plans often have lower monthly premiums. Consumers can, however, save receipts and reimburse themselves from the account later, after the balance has grown.

Here are some questions and answers about health savings accounts:

Q: How much can I contribute to an HSA?

A: Jake Spiegel, senior research analyst at Morningstar, suggests contributing an amount equivalent to your annual deductible. The IRS limits annual contributions to $3,350 for an individual in 2016 (plus $1,000 for those 55 and older). The cap includes contributions from you and your employer.

Q: Are there any fees for using an HSA?

A: Health savings accounts may have fees, just as many traditional bank accounts do. If you have the account as a workplace benefit, your employer probably pays the monthly maintenance fee. Extra fees like the cost of checks, or of receiving statements on paper rather than electronically, are typically the employee’s responsibility.

Q: What if I have an HSA and my employer switches administrators?

A: If your employer changes administrators, you don’t necessarily have to move your money to a new account. It is fine to have more than one health savings account, and you may want to use one for saving and one for spending, said Todd Berkley, managing director of BenefitWallet, an health savings account administrator. But it may make sense to move the money, since your employer will probably make contributions only to accounts handled by the new administrator. And if your employer has been paying monthly account fees, you may have to start paying them on the older account.

If you do shift the money to a new account, it is usually best to have the account administrator handle the transfer, Berkley said. You can simply withdraw the money yourself, and redeposit it in the new account. But do so promptly to avoid possible taxes and penalties for an improper withdrawal, he said.