HSAs
Will HSAs Play a Big Role in Reform?

by Martin Trussell


Healthcare reform is here along with its rather large price tag. The Congressional Budget Office (CB0) estimates that it will cost $940 billion to subsidize insurance coverage for an additional 32 million people over the next 10 years. But, at the end of those 10 years, the health reform statute will generate enough revenue to offset this spending. In fact, the CBO says the new law will even contribute to reducing the federal deficit to the tune of $143 billion.

To make the math work, Congress has ordered a combination of new taxes and the reduction of some long-standing healthcare related tax breaks. The Cadillac Tax on the most generous and expensive health plans has been well documented. Beginning in 2013, contributions to FSAs will be limited to $2,500 even though employers already set the limit on how much money their employees can set aside for FSAs under the current rule.

With all of this taxing and the closing down of tax breaks going on, one tax break that healthcare reformers originally targeted has gone largely untouched: The health savings account (HSA). The HSA was a part of the George W. Bush healthcare reform bill, which gave us Medicare Part D, the popular Medicare program that provided seniors with prescription drug coverage.

An HSA is a tax-advantaged medical savings account that is available to Americans who are enrolled in a qualified high deductible health plan (HDHP). Funds contributed to the account are not subject to federal income tax at the time of deposit. Interest or any investment income earned on deposits is non-taxable and the funds can be removed from the account tax-free to pay for qualified medical expenses.

Unlike an FSA, HSA funds roll over and accumulate year to year if not spent. Employers own health reimbursement arrangements (HRAs). But, employees own HSAs, which serves as an alternate tax-deductible source of funds paired with HDHPs.

With its triple tax advantage and emphasis on personal responsibility, how did this Bush-era health plan survive the Obama-era healthcare reform? Some insiders say that reformers in the administration and on Capitol Hill came to realize that the low-premium HSA-type health plan, coupled with its triple tax-advantaged savings vehicle, is exactly what’s needed to draw the young and the healthy to the insurance pool alongside the old and the not so healthy.
Spreading risk is critical to the entire health reform scheme. But, let’s face it, the legislation does not set high enough penalties for not being covered to convince the intentionally uninsured to buy health insurance, at least not their father’s insurance plan with the low office visit co-pays and high premiums. But, an offer that’s just too hard to pass up is a low-premium option that supplies Cadillac plan coverage above a little higher deductible along with add tax breaks for the money saved, interest earned, and any distributions used for qualified medical expenses.

One person who knows this subject from the inside is J. Kevin McKechnie, director of the American Bankers Association HSA Council. McKechnie recently told the New York Times that affordable options must be available if companies are ordered to offer insurance or people are made to buy it. He noted that HSA-qualified health plans generally have cheaper premiums while HSAs help people pay for their costs before they hit the deductible.

In a Fox and Friends broadcast, McKechnie said HSAs will have a great role in the success of the healthcare overhaul. He noted that HSA health plans will attract the young and healthy to the insurance pool, which is the group that will help make health insurance affordable for everyone else. “The irony is that they [HSAs] may be the lifeboat for this entire plan,” McKechnie told Fox News.
Chairman Emeritus of the HSA Council, E. Craig Keohan, credits the work of McKechnie and other HSA Council members for bringing lawmakers around to the idea that HSAs can be good for healthcare reform. He said, “Over the past year, we called on each member of Congress at least twice. We left them with the message that Americans are not only benefiting from the lower premiums and tax savings these plans offer, but also from the incentive to make better health decisions.”

New Taxes for Healthcare

Does this mean that HSAs have escaped unfazed from a year’s worth of legislative wrangling? Well, not entirely, but the changes made to them were slight. Here they are:
1. Effective January 1, 2011, tax-free HSA dollars can no longer be used to purchase over-the-counter drugs not prescribed by a doctor.
2. Effective January 1, 2011, the tax on HSA distributions that are not used for qualified medical expenses will increase to 20% from 10%.
That’s it. In a legislative process in which everyone was asked to bear some of the burden, it seems that very little was asked of health savings accounts. Could it be that their real contribution to healthcare reform has yet to be seen?
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Martin Trussell is SVP of Business Development & National Accounts at First Horizon Msaver, Inc. Marty has over 25 years of experience in the health benefits industry and writes a well-followed blog covering innovations in healthcare: healthplaninnovation.com.