Will Proposed Legislation Bring HOPE to Those Who Can't Open HSAs Today?

Many Americans don't have access to an account to help them manage out-of-pocket health-related costs. This new proposal would offer assistance.

Health Savings Accounts help more than 60 million Americans (owners and their spouses and tax dependents) manage the cost of medical care. These people can pay their medical, dental, and vision expenses with tax-free funds, thereby reducing their net cost.

Example: Bob and Carol are neighbors. Each undergoes a $1,000 MRI for which they're responsible. Both are in the 30% tax bracket (federal income and payroll taxes, plus state income taxes). Bob doesn't have a Health Savings Account, so he must earn $1,430 to pay the $1,000 bill and the taxes on that income. In contrast, Carol made pre-tax contributions to her Health Savings Account, so she pays only $1,000 in income to satisfy the same bill.

Multiply this example over $3,000 or $5,000 in annual bills for medical deductible and coinsurance expenses, medical care not covered by insurance, 50% of restorative dental work, orthodontics, prescription glasses and contact lenses, and vision-correction surgery. The difference in the effective amount paid can amount to $1,500 or more annually. That's $1,500 that one family must pay in taxes that another family with the same qualified expenses can spend on a vacation, auto repairs, or summer camp.

That's the power of Health Savings Accounts. Unfortunately, most Americans, including many who face high medical deductibles, don't have access to these accounts under current federal tax law. A number of legislative proposals have been drafted to address specific populations excluded from opening and funding Health Savings Accounts.

Those proposals target specific groups (some of which are highlighted below). HOPE Accounts provide many (but not all) of these same tax and time benefits to the larger population, thereby offering an opportunity for advocates for each of these groups to unite to support a single proposal.

HOPE Accounts

Anyone with ACA MEC coverage would be eligible to both open and make and receive contributions to a HOPE Account. Let's translate: ACA refers to the Affordable Care Act, the 2010 landmark legislation that increased the federal government's control over the medical insurance market. MEC refers to Minimum Essential Coverage, the ACA terms for benefit packages that cover a comprehensive list of services ranging from maternity and other inpatient care and prescription drugs to behavioral health and outpatient therapy services.

In other words, any American enrolled in coverage deemed comprehensive by the federal government would be eligible to open and fund a HOPE Account, either on her own or through an employer.

The structure of a HOPE Account is simple. It looks like a Health Savings Account - a trust account owned by an individual that's not time-bound and is portable and inheritable. The HOPE Account differs somewhat in tax treatment.

• Employer contributions: Tax-free to the employee through both a Health Savings Account and a HOPE Account.
• Employee/owner contributions: Health Savings Account contributions are pre-tax when made through an employer's Cafeteria Plan and tax-deductible otherwise. In contrast, HOPE Account contributions by owners are always post-tax, a treatment similar to deposits to a Roth 401(k) plans or Roth Individual Retirement Arrangements, or IRAs.

In both accounts, all balances grow tax-free and all distributions for qualified expenses are tax-free.

Why the different treatment of contributions? One word: Score. All proposed legislation must be scored to measure its 10-year effect on the federal budget. The greater the effect on federal spending or tax revenue, the more its proponents must propose offsetting measures (like eliminating other tax breaks or raising taxes) to neutralize the effect on the federal budget. permitting only post-tax individual contributions maintains the flow of federal income and payroll taxes, which substantially reduces the financial impact on the federal budget.

HOPE Accounts don't turn Bobs (in the example above) into Carols. Health Savings Account owners will always enjoy a tax benefit on their contributions that HOPE Account owners can't access. But like balances in Roth retirement accounts, HOPE Account funds grow over time tax-free and are withdrawn tax-free (in the case of HOPE Accounts, the tax break on distributions is applied to qualified expenses only).

It's not an either/or proposition. Health Savings Accounts and HOPE Accounts would both be available in the market. Most Americans would qualify for one or the other or both, depending on their medical coverage. A handful may benefit by establishing both, using HOPE Accounts to contribute for months that they're temporarily ineligible to fund the more tax-advantaged Health Savings Account.

High Deductibles Aren't Enough

You may read articles in the popular press about the number of Americans covered by high- deductible health plans. These articles are confusing. Under the federal tax code, high deductible health plan refers to coverage that permits anyone enrolled who meets other requirements to open and fund a Health Savings Account. In other words, the tax code defines a high-deductible health plan as an HSA-qualified plan.

But too many people who measure the effect of out-of-pocket medical costs on families use the term high deductible health plan as a generic label for any plan with a deductible above a certain figure (often the statutory minimum annual deductible for an HSA-qualified plan, or $1,400 for self-only and $2,800 for family coverage in 2022). But enrollment figures in those plans include tens of millions of Americans who face high deductibles but can't open or found a Health Savings Account to help them manage those out-of-pocket expenses. Some have access to a Health FSA through their employer, so they have an opportunity to use pre-tax funds to pay their out-of-pocket medical, dental, and vision expenses. But many do not.

HOPE Accounts would help these hard-working Americans by giving them (and their employers) an opportunity to enjoy some of the tax advantages while paying current high out-of-pocket qualified expenses or saving for future services.

Others Excluded

Many workers with medical conditions. Today, when employers offer more than one medical plan, employees choose the plan with lower out-of-pocket costs - even if they sometimes end up paying more of the cost of coverage (premiums) and care (out-of-pocket costs for services) by the end of the year. In many cases, all the plans offered have plans with deductibles greater than $1,500 for self-only coverage, but the richer plan may cover office visits subject to a copay or have a lower deductible for prescription drugs. Those design features disqualify enrollees from opening and funding a Health Savings Account, even if the deductible exceeds the statutory minimum. With HOPE Accounts, employers could offer the same company contribution to every employee enrolled in either plan. Employees would then choose a plan based on their preference for the trade-off between premium and out-of-pocket costs and the tax treatment of their contributions to an account to help them manage current and future qualified expenses.

Lower income working seniors. Imagine you and your co-worker both face a $3,000 deductible. You make only $30,000 annually and your co-worker earns $127,000, so you have a harder time paying that deductible. Now imagine that our company contributes $1,500 to each employee's Health Savings Account to offset those expenses. That's great. Except that you receive Social Security benefits to supplement your small salary. You're forced to enroll in Medicare Part A (inpatient care), which means that you can't open or fund a Health Savings Account. So, your well-off co-worker not only earns more money, but she can accept money from the company that you can't to pay medical bills. A HOPE Account would allow your employer to deposit the same $1,500 tax-free into an account for your medical expenses. And you could make post-tax contributions that would grow tax-free for future tax-free withdrawals for qualified medical expenses.

Working seniors at small companies. In most cases, working seniors at companies with fewer than 20 employees must enroll in Medicare Part A and Part B (outpatient services) to remain on the group plan. This isn't a Medicare requirement, but most insurers require enrollment because Medicare is required to process the claims first (thereby reducing the amount of claims paid by the private group plan). These working seniors can't enjoy the same tax savings as their co-workers or neighbors who are the same age and earn the same income but work for a company with 20 or more employees. A HOPE Account would allow these working seniors to receive a company contribution and contribute to an account whose growth and distributions for qualified expenses are tax-free.

Veterans. We owe our freedom to Americans who are willing to put their life on the line for our nation. And as part of that contract, we provide them with access to medical care through the Department of Veterans Affairs (VA) medical system and allow many to carry TRICARE (coverage for active and many retired military personnel) after they leave active service. Yet if they take jobs in the private sector and enroll in an HSA-qualified medical plan, military retirees who maintain TRICARE as secondary coverage can't make or receive contributions to a Health Savings Account. And those without TRICARE who receive care that's non-preventive or not related to a service disability (think appendectomy, joint replacement, diabetes, and most cancer treatments) can't fund a Health Savings Account for three months. A HOPE Account would allow TRICARE enrollees access to benefits similar to a Health Savings Account for the first time. For those who receive VA care, a HOPE Account in addition to a Health Savings Account would ensure that they receive tax benefits all 12 months of the year, regardless of their medical services received.

Native Americans. The US government has treaty obligations dating back to the 1800s to provide medical care for many Native American tribes, which it offers through the Indian Health Services. IHS provides care through facilities on reservations. But Native Americans who work outside the reservation and enroll in HSA-qualified coverage can't make or receive Health Savings Account contributions for three months if they access non-preventive care through the IHS (which is usually the only convenient source of care). A HOPE Account would supplement a Health Savings Account so that they wouldn't miss out on the opportunity to receive a periodic employer contribution or to enjoy tax benefits.

The Bottom Line

HOPE Accounts represent a compromise. They offer some - but not all - of the tax advantages of a Health Savings Account. In a vacuum, Health Savings Accounts always offer superior tax benefits. But we don't live in vacuums. Rather, we live in a world of choice. And not all those choices allow us to open and fund a Health Savings Account. HOPE Accounts would allow those who don't have access to the same options that we do, or who for a variety of reasons make different decisions, to enjoy some of the advantages of Health Savings Accounts.

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