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Are the accounts a benefit for all or just for high earners?
Update: House Passes Republicans' ACA Replacement Bill
The U.S. House of Representatives passed the American Health Care Act on May 4, 2017; see House Passes GOP Health Care Bill; Now What?
The House Republican leaders' proposed bill to repeal and replace the Affordable Care Act is directing renewed attention to the role played by health savings accounts (HSAs) in promoting health care consumerism and helping employees pay for out-of-pocket health care costs. But some say that HSAs are an option only for the wealthy.
Expanding the use of HSAs is a cornerstone of the Republicans'
American Health Care Act (AHCA), which, if enacted, would reduce government subsidies that help people without employer-based coverage to purchase health care policies. Along with providing age-based tax credits to people who buy nongroup policies, the AHCA would encourage individuals to save for future health care needs through HSAs by nearly doubling the amount of money that can be contributed with pretax dollars.
Annual contribution limits for HSAs linked to high-deductible health plans are
currently set for 2017 at $3,400 for self-only coverage and $6,750 for family coverage, plus an additional $1,000 catch-up contribution for account holders age 55 and older. These limits would rise substantially under the AHCA. The maximum HSA contribution would increase to equal the annual out-of-pocket maximums (OOP max) set for high-deductible health plans (for 2017, the single OOP max is $6,550 and the family OOP max is $13,100).
"Many employers agree that HSA limits should match out-of-pocket maximums," said Shandon Fowler, senior director of product strategy at Benefitfocus, a Charleston, S.C.-based provider of cloud-based benefits software. On employees' wish list, "some also want to see HSAs paired with all plans—not just HDHPs."
The AHCA also would:
A Controversial HSA Amendment: Added and Withdrawn
A provision in the American Health Care Act that would, after the purchase of qualifying insurance, deposit any excess insurance premium tax credit into an HSA was removed by amendment during committee hearings from the version of the AHCA broght before the House on March 24. "The excess of tax credits that exceed the cost of insurance coverage would no longer be available to be paid into HSAs, reportedly because of a concern that they might thereby become available to pay for abortions," explained Timothy Jost, a professor at the Washington and Lee University School of Law in Virginia.
"This latest amendment is baffling,"
wrote Devon Herrick, senior fellow at the Dallas-based National Center for Policy Analysis, which advocates for market-oriented health care solutions. "Not allowing funds (or excess funds after insurance premiums) to be deposited into an HSA will take away HSAs from millions of Americans, increase their out-of-pocket costs and lower their access to primary care in the process." He added, "I can hardly think of a more short-sighted decision."
The provision to deposit any excess tax credit funds into an HSA was restored in the version of the AHCA that was
passed by the House on May 4.
[SHRM members-only HR Q&A: Are employer contributions to an employee's health savings account (HSA) considered taxable income to the employee?]
Who Benefits from HSAs?
Juliana Darrow, a fellow at the Denver-based Millennial Policy Center, a market-oriented policy institute that addresses issues affecting the Millennial generation, recently defended the AHCA's expansion of HSAs. In an
opinion column in
The Hill, she argued that HSAs "protect against the financial burden of catastrophic events while allowing for the use of pretax dollars to pay for routine medical expenses." HSAs, she believes, are "encouraging consumers to become more price conscious" when selecting health providers for nonemergency services. She called the AHCA's efforts to expand the use of HSAs "a step in the right direction."
But Families USA, a Washington, D.C.-based advocacy group that supports progressive health care policies, contended
in an online post that the AHCA's proposed changes "would only help the wealthy," and that HSAs "don't work for most families, especially those living paycheck to paycheck and who can't afford to set aside thousands of dollars to pay the full cost of their health care bills."
The post concludes, "This bill would just open the door for wealthy people to stash more money in these accounts to avoid paying taxes."
Not to be overlooked, however, is that employers also play a crucial role in funding HSAs.
New research from Devinir, a Minneapolis-based provider of HSA administration services, analyzed data from the top 100 HSA providers. Among the findings: Employer contributions represented 26 percent of all dollars in HSAs as of year-end 2016.
That percentage is likely to grow as more employers offer HSAs linked to high-deductible plans, and more contribute to their employees' accounts. According to the Society for Human Resource Management's
2016 Employee Benefits research report, HSAs in the U.S. were offered by one-half of organizations in 2016, up from 43 percent in 2012, and employers were more likely to make contributions to these accounts in 2016 (32 percent) than they were in 2012 (25 percent).
A factor that could work against the growth of HSAs, however, is the "Cadillac tax," which
remains part of the AHCA although its effective date is delayed from 2020 until 2026. The controversial 40 percent excise tax on employer health plans would apply to plan costs above $10,200 for individual coverage and $27,500 for families, indexed for inflation. Because
employer and employee pretax contributions are counted as part of a plan's value in reaching the Cadillac tax threshold, employers are concerned that the tax, unless removed from the AHCA (or repealed under the Affordable Care Act) will undermine their ability to fund HSAs and similar accounts.
"Economists say that the tax exclusion [for employer-provided health care] is a primary driver of cost. One way to deal with the cost issue is to give people a sense of ownership of their health care dollars" through HSAs, said J.D. Piro, senior vice president at consultancy Aon Hewitt in New York City. "The Cadillac tax works against that because it would tax employees' HSA contributions as employer contributions."
He added, "If you want to give people a sense of ownership of their health care, not taxing HSA contributions is a way to do it."
Tax Advantages Not Just for the Highly Compensated
While tax-advantaged accounts will, by their nature, provide larger savings to those whose incomes push them into higher tax brackets, those with moderate incomes also can see significant savings by deferring pretax dollars into an HSA. Based on
2017 income tax rates, for instance, dollars deferred to an HSA will be spared income taxes of 15 percent on earnings over $18,651 and 25 percent on earnings over $75,900.
In addition, salary deferral contributions avoid employee-paid payroll taxes of 7.65 percent for Social Security and Medicare. According to
IRS guidance, "The employer contributions [to an HSA] are not subject to withholding from wages for income tax or subject to the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), or the Railroad Retirement Tax Act." This differs from the treatment of pretax salary deferrals for a traditional 401(k) plan; those contributions are not taxed as income but
are subject to payroll taxes (FICA/FUTA).
But the wide scope of
HSAs' tax benefits are often overlooked by employees, and employers may not be adequately communicating HSAs' triple tax advantages (no payroll taxes deducted and no income taxes paid on salary deferred contributions, and no taxes owed on funds withdrawn to pay for qualified medical expenses).
"While progress is being made—and consumers are beginning to take advantage of HSAs and similar tax-favored accounts—many are still simply unaware of all the benefits offered through these products," said Barbara Boudreau, vice president of strategy at ConnectYourCare, an HSA services provider based in Hunt Valley, Md.
recent survey sponsored by her firm polled more than 14,000 employees and nearly 250 employers of many types and sizes. Employees indicated they chose to enroll in an HSA primarily as a way to:
But 47 percent of employers said their workers did not enroll in HSAs and similar accounts because they were unaware of the tax benefits.
Related SHRM Articles:
Rising Deductibles Blur Line Between Traditional and High-Deductible Plans [Sidebar:
High-Deductible Plans and Funded HSAs: Best of Both Words?],
SHRM Online Benefits, February 2017
Address HSA Misconceptions During Open Enrollment,
SHRM Online Benefits, October 2016
HSA Tax Benefits Often Overlooked,
SHRM Online Benefits, July 2016
IRS Sets 2017 HSA Contribution Limits,
SHRM Online Benefits, May 2016
SHRM Health Care Reform Resource Page
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