Hatch Health Bill

The Family and Retirement Health Investment Act of 2008 (S.3626) has been introduced by Senator Orrin Hatch. The full text of the bill is here.

Here is a summary of what is in the bill:

Purchase of Any Health Insurance with HSA Funds Allowed. Allows anyone with funds in an HSA account to pay the premium for their HSA-qualified policies regardless of their circumstances. Under current law, people can only use their HSA account to pay for health insurance premiums when they are receiving federal or state unemployment benefits, or on a COBRA continuation policy from a former employer.

Greater Flexibility Using HSA Account to Pay Expenses. Allows all expenses incurred after HSA-qualified coverage begins to be reimbursed from the HSA account as long as they set up their account by April 15 of the following year. When people enroll in an HSA-qualified plan, some let a few months elapse between the time when their coverage starts (e.g., January) and when the health savings bank account is set up and becomes operational (e.g., March). However, the IRS does not allow for medical expenses incurred in that gap (between January and March) to be reimbursed with HSA funds.

Expanded Opportunities for Persons on Medicare. Allows Medicare beneficiaries enrolled only in Part A to continue to contribute to their HSA accounts after turning 65 if they are otherwise eligible to contribute to an HSA. Current law restricts HSA participation by Medicare beneficiaries, which means that once a person enrolls in Medicare they may no longer contribute to their HSA (although they may continue to spend money from an existing HSA). For most seniors, enrollment in Medicare Part A is automatic when receiving Social Security and is difficult to delay or decline enrollment.

However, the current deductible for hospital coverage under Medicare Part A is over $1,000 per admission, nearly equal to the minimum deductible required for HSA-qualified plans.

Allows seniors enrolled in Medicare Medical Savings Accounts to contribute tax-deductible money to their accounts. Current law prohibits Medicare beneficiaries enrolled in Medicare MSA plans from adding their own money to their MSAs. Although created in the 1997 Balanced Budget Act, Medicare MSAs are a relatively new type of plan under the Medicare Advantage program. MSA plans allow seniors to enroll in a high-deductible plan and receive tax-free contributions from the federal government to HSA-like accounts. However, the government contribution is significantly lower than the plan deductible, and the beneficiary may not contribute any of their own money to fill in the gap.

Clarifies that Medicare premiums of a spouse on Medicare are reimbursable from an HSA even though the HSA account holder is not age 65.

Expanded Eligibility for Veterans. Allows Veterans to use VA medical services and retain their HSA eligibility. Current law prohibits veterans from contributing to their HSAs if they have utilized VA medical services in the past three months.

The bill would remove those restrictions and allow veterans to contribute to their HSAs regardless of utilization of VA medical services.

Catch-up Contributions to Same Account Permitted. Allows both HSA-eligible spouses to make catch-up contributions to the same HSA account. Current law allows HSA-eligible individuals age 55 or older to make additional catch-up contributions each year. However, according to the IRS, even if both spouses are eligible to make catch-up contributions, the contributions must be deposited into separate HSA accounts. The bill would allow the spouse who is the account holder to double their catch-up contribution to account for their eligible spouse.

Clarification of FSA and HRA Rollovers to HSAs. Allows a one-time rollover of unspent funds from Flexible Spending Arrangements (FSAs) and Health Reimbursement Arrangements (HRAs). The Tax Relief and Health Care Act of 2006 allowed employers that previously offered FSAs to roll over unused FSA funds to an HSA as employees transitioned to an HSA for the first time. However, the IRS issued guidance earlier this year that did not allow the unused FSA funds to be rolled over to HSAs unless the employer offered a "grace period" that allows medical expenses to be reimbursed from an FSA through March 15 of the following year (instead of the usual "use or lose" by December 31).

This bill clarifies current law to allow a one-time roll-over of funds regardless of whether an employer offers a grace period in its FSA plan in order to ease the transition from FSAs to HSAs.

Expanded Definition of "Preventive" Drugs. Allows HSA-qualified plans to include medications for chronic conditions as "preventive care." Current law allows "preventive care" services to be paid by HSA-qualified plans with out being subject to the policy deductible. IRS guidance does not permit plans to cover services that treat existing conditions. The bill expands the definition of "preventive care" to include prescription and over-the-counter drugs that also prevent worsening of or complications from chronic conditions.

This will provide additional flexibility to health plans that want to provide coverage for these medications and remove a perceived barrier to HSAs for people with chronic conditions.

Other Non-HSA Provisions. The bill also makes several changes to the definition of "qualified medical expenses" in Section 213(d) of the Internal Revenue Code. The modification would affect all health care programs using the definition, including HSAs, HRAs, and FSAs. These changes include allowing Americans to deduct the cost of:

• Fees for "direct practice" physicians;
• Exercise and physical fitness programs, up to $1,000 per year; and,
• Nutritional and dietary supplements, up to $1,000 per year.

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