No Shortage of Legislative Ideas to Expand Health Savings Accounts

Congress is considering various proposals to expand the Health Savings Account opportunity to more Americans. These approaches target specific populations left behind by current regulations.

Many Republicans and some Democrats in Congress understand the importance of helping hard-working American families manage the cost of medical care. A handful of bills introduced during this session of Congress seek to expand access to Health Savings Accounts for seniors, children, enrollees in medical coverage with high out-of-pocket costs, and Health FSA enrollees who want to transition to Health Savings Accounts.

The bills are unlikely to pass as independent legislation. But there's hops. Most of them are short (only two to four pages) and can be inserted easily into healthcare, tax, or other revenue bill. And it's likely that Republicans will win control of at least the House of Representatives in November's mid-term elections. A change in power increase the likelihood that a post-election lame-duck session of Congress will pass comprehensive legislation that allows outgoing Democrats one last opportunity to pass legislation important to them and for Republicans to negotiate a price that includes some of their legislative priorities in the bill.

Health Savings Accounts for Seniors

We wrote about this legislation last month. It would allow Medicare enrollees to open and fund a Health Savings Account. Under current law, Medicare is disqualifying coverage. So, all Medicare enrollees - whether a retiree or working senior collecting Social Security benefits - are barred from contributing or accepting employer contributions to a Health Savings Account.

This bill would allow them to fully participate. The value? They can contribute up to $4,650 this year. Assuming a 12% federal marginal tax rate, they'd save about $550 in taxes by contributing to their Health Savings Account and then paying a current bill, rather than paying the provider directly. If they live in a state that imposes a 5% income tax, the savings rise to nearly $800. For seniors who live on a fixed income, that annual savings may represent a trip to a grandchild's graduation or replacing tires on a vehicle.

It would also allow working seniors who collect Social Security benefits to receive an employer Health Savings Account contribution and also deposit a portion of their paycheck into the account to reduce their taxable income. In short, it would put them on par with their younger co-workers and contemporaries who earn more and don't have to rely on Social Security benefits to close their personal budget gap.

The downside to this is the changes required to pay for the loss of tax revenue to the federal Treasury. The bill would extend the 20% additional tax for withdrawals for nonqualified expenses, which currently doesn't apply beginning at age 65. And Medicare premiums would no longer be a qualified expense. Neither change represents a high price. The 20% additional tax doesn't affect owners who use their balances as in tended. And few Health Savings Account owners accumulate enough money to fund all their retirement expenses, so not spending balances on Medicare Part B and Part D premiums leaves more for deductibles, coinsurance, and services not covered by Medicare.

Health Savings Account for Kids

Another proposed bill would allow parents to set up and fund (up to $3,000 per child per year) Health Savings Accounts for children. Parents would own the account until the child's 18th birthday, after which the child would own it. Any distributions - even for qualified expenses - prior to the child's 18th birthday - would be included in the parent's taxable income and subject to the additional 20% tax. Withdrawals would be tax-free once the child turns age 18 and is no longer covered on the parent's medical plan.

This bill puts Health Savings Account more on par with Individual Retirement Arrangements. Parents can open IRAs for their children once a kid starts to earn money babysitting or mowing lawns. But tax dependents can't open Health Savings Accounts. This bill would allow them to do so through their parents.

This proposed legislation expands the opportunity for a family to save on taxes by funding a parent's account to the statutory limit and then fund children's Health Savings Accounts with additional money. But only about 4% of account owners contribute to the statutory maximum today. This bill would allow higher income families to shield more income from taxes. But it wouldn't offer a practical advantage to most taxpayers.

Health FSA Rollovers into Health Savings Accounts

Employers whose medical plans and FSAs run on different plan years put their employees in a difficult position when the company introduces a Health Savings Account program. The employees most attracted to the benefits of the Health Savings Account are those who are already enrolled in the tax-advantaged Health FSA. But they can't disenroll mid-year from the Health FSA to join the Health Savings Account program. They must either (1) enroll in the HSA-qualified plan and delay opening the account or (2) delay enrollment in the HSA-qualified plan for a year, let the Health FSA run out, and have a gap during which they can't reimburse qualified expenses from either a Health FSA or Health Savings Account.

The solution? A law that allows for mid-year Health FSA disenrollment to enroll in a Health Savings Account program and, as a bonus, a rollover of unused Health FSA election balances into the Health Savings Account.

Sounds great - for the employee. But not so much for the employer.

Example: Alyssa is paid biweekly and elects $2,600 to his Health FSA, which runs on the calendar year. He spends $500 before July 1, when he enrolls in the employer's new Health Savings Account program. This bill would allow him to roll over $2,100 (his full election less the $500 spent) into his Health Savings Account. But he's had only $1,300 deducted from payroll, so his employer would be on the hook for that $1,300.

A better approach would be a revision allowing for mid-year Health FSA termination for participants who've spent less than their payroll deductions to date. They could then roll over their total payroll deductions less any expenses reimbursed.

Example: Same facts as above. Alyssa can roll over $800 (the $1,300 of payroll deductions less the $500 already reimbursed) to seed her new Health Savings Account. If she had already spent more than $1,300, she could not disenroll from the Health FSA mid-year.

Actuarial Value Path for an HSA-qualified Plan

You've heard me harp on this issue before. The current definition of an HSA-qualified plan is very prescriptive, with all but select preventive services applied to the deductible. This provision disqualifies many plans with high deductibles that cover some services - PCP visits or generic prescription drugs, for example - in full after a copay. People enrolled in these plans face high out-of-pocket costs, but they can't open and fund a Health Savings Account to manage these expenses.

The solution: A second path to creating an HSA-qualified plan, based on actuarial value. This term refers to the percentage of total claims paid by the insurer across all enrollees in a particular plan. The higher the dollar value of claims paid by the insurer, the higher the actuarial value.

Example: Enrollees in a particular medical plan incur $100 million in total claims. Of this amount, the insurer pays $73 million and patients pay $27 million in deductibles, copays, and coinsurance. This plan has an actuarial value of 73 . . . If the insurer had paid $85 million of claims, the actuarial value would have been 85.

This approach makes total sense. People should be eligible to open and fund a Health Savings Account based on their potential out-of-pocket financial responsibility for their care, without the highly prescriptive plan requirements that disqualify a plan with a high deductible.

The Bottom Line

Health Savings Accounts aren't a priority for the majority party in Congress. But a change in power sparks a dynamic that may include some healthcare legislation. In December 2016, Congress bid goodbye to outgoing Vice President Joe Biden in what was generally thought to be his retirement from politics by passing the 21st Century Cures Act. That bill included federal funding for cancer research - a cause close to his heart. The caboose on that bill was a provision creating Qualified Small-Employer Health Reimbursement Arrangements (QSEHRAs - pronounced Cue-ser-ahs), a GOP initiative. History may just repeat itself in December 2022.

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