More Mischief from the Dark Side
An update by Roy Ramthun on the House Ways and Means assault on HSAs is attached as a comment. Joint Tax Committee says the new rule change will have a big impact on CDHC plans. Refuses to say why. Members voted on the new rules without knowing what difference they would make. Other comments also attached.
[This article is a continuation of the previous FYI: A Bad HSA Idea]
HSA substantiation language was included in H.R. 5719, the Taxpayer Assistance and Simplification Act. This legislation was reported out of the House Ways & Means Committee this afternoon on a straight party-line vote of 24Y – 17N. I am expecting the legislation to be voted on by the entire U.S. House of Representatives within the next two weeks. However, its fate is uncertain in the U.S. Senate.
At the mark-up today, Chairman Rangel offered an amendment to his original mark (found here) that delays the implementation of the HSA substantiation provision (see Sec. 17, starting on page 21) by two years (until 2011). We are not sure why the Chairman decided to delay the provision’s effective date, but the delay will provide extra time to eliminate the provision or give people more time to adjust to its implementation.
Rep. Paul Ryan (R-WI) led the Republican charge in opposition to the HSA substantiation provision. He questioned the large amount of revenue raised by the provision ($485 million over 10 years – now decreased to $308 because of the two year delay). According to staff on the Joint Tax Committee (who scores tax provisions for the Congressional budget), the number was derived based on two factors:
1. The IRS will be collecting more penalties on HSAs; and
2. Contributions to HSAs will go down.
The Joint Tax staff declined to specify how much of the revenue raised would come from penalties for unsubstantiated withdrawals and how much would come from decreased contributions to HSAs. They refused to say that there would be fewer HSAs — only that contributions would go down. They did agree however that the HSA substantiation provision would have a significant impact on the HSA market.
During discussion, Rep. Sam Johnson (R-TX) noted that the number of folks reporting non-medical spending was relatively consistent (i.e. – what’s the problem??). He stated that he did not think that HSAs should have the same rules as FSAs. Further he raised the issue of HIPAA privacy if banks are administering the accounts. Rep. Lewis (D-GA) noted that the two-year delay in implementation should be sufficient time to deal with those types of issues.
Rep. Paul Ryan (R-WI) offered an amendment to strike Sec. 17 (HSA substantiation). Rep. Cantor (R-VA) was a cosponsor of the amendment but not present at the mark-up. A number of Republican members spoke in favor of the Ryan amendment including Reps. McCreary (R-LA), Brady (R-TX) and Camp (R-MI).
The amendment fell on a near party-line vote of 24Y – 15N. Rep. Jon Porter (R-NV) voted with the Democrats against the Ryan amendment.
The House Ways and Means Committee has sent a bill to the House that includes language requiring the substantiation of all claims out of the HSA. This would mean that HSA’s will now be administrated just like FSA’s. Details on why and how this happened are included below. The bottom line is if this passes you will have to submit your medical receipts to your HSA administrator for substantiation. This will result in increased administration costs to you, delay in reimbursement and increased out of pocket costs. It may also limit access to your HSA funds and investments.
The bill will be on the floor of the U.S. House next week, and all individuals should immediately begin contacting their Members of Congress and asking them to vote NO on H.R. 5719, the “Taxpayer Assistance and Simplification Act of 2008,” because of the provision that will create a 100% increase in monthly administrative fees and will destroy the ability of banks to offer HSAs.
The following talking points can be used when talking to members of Congress and their staff:
It is one thing to pay for dental visits or eyeglasses with your own funds and then get reimbursed from your FSA. It is completely different to have to pay all of your medical expenses, doctors’ visits, prescriptions, labs, x-rays, surgical costs and ER expenses out of your own funds and have to wait to get reimbursed. People can’t afford to pay expenses this way.
• The current IRS procedures for tracking HSA expenditures are more than sufficient and burdensome enough. The Financial Institutions file the 1099 SA to report distributions, the 5498 SA to report contributions received and fair market value. The employers file W-2s which contain specific Health Savings Account contribution information, and the accountholder files the 8889 form for self reporting contributions and distributions. The data correlated from these forms should match – otherwise there would be a potential issue for audit. Compared to the simple self-reporting for charitable giving and Section 173 qualification, the HSA is one of the most scrutinized tax savings vehicles available to the average person.
• Our whole tax system is based upon self-reporting. HSAs suffer much more scrutiny than tip reporting and self-employment wage reporting. Evolution’s arguments that the IRS has no way to audit HSA spending are completely spurious – there are far more lucrative areas for the IRS to put resources to if that were truly the issue.
• There are no real restrictions on how to spend HSA funds. If a person spends HSA funds on non-qualified expenses, they pay 10% additional tax, in the same way one can take an early IRA distribution. Given the scrutiny described above, the HSA should be less susceptible to abuse than an IRA.
• The HSA is an individually owned account. The Flexible Spending Account is an employer group owned account. Substantiation serves the interest of the employer, who has to pay for the technology to be able to offer the FSA. The trade off is that they get to keep any money that the employee sets aside in the FSA but doesn’t use, so the employees unwittingly pay for this technology to the benefit of companies like Evolution Benefits, out of the money set aside for medical care which they do not use. The individual loses all the benefits, including future medical care, under the FSA model with its substantiation requirement. The unused funds in an HSA accrue for future health care and retirement expenses of the accountholder.
• Substantiation will add enormous costs to the HSA. These costs will be borne in the end by the consumer. The whole purpose of the consumer directed healthcare concept was to remove unnecessary overhead from the healthcare process. Studies show that this is exactly what has been occurring. Adding this requirement will require banks to become claims administrators – aside from the fact that most banks are not in this business, it simply shifts the costs of healthcare administration that already exist to other vendors, such as Evolution Benefits.
• Evolution’s own card does not contain merchant code restrictions, thus the card can be used anywhere for any purpose. The leading HSA administrators do use merchant code restrictions – one purpose is to try to train individuals to use the account for healthcare related purposes and prevent their unintended use for non-qualified expenses – the other is to prevent non-qualified use of the card since the HSA is a limited purpose account. Purchases at an electronics store for example are in all likelihood not only non-qualified, but in many cases they are an indication of card and ID theft. The Financial institutions do scrutinize HSA transactions. Their tax reporting burden, and the burden of correction of incorrect tax filings align the interests of the bank and accountholder to present the IRS with timely and accurate tax reporting the first time.
• Requiring substantiation will in effect amount to a restraint of trade. If banks are required to substantiate HSA expenses, there are only a handful of banks with the infrastructure or resources to build such substantiation engines. Because most community banks and credit unions simply do not have the resources to put such costly technology into production, they would have to buy from vendors and pass on the cost to their accountholders – raising the price of HSA administration with no real benefit to the IRS or anyone else, save one.
• If Evolution’s intent was as its CEO Patricelli claims, to just have the Financial Institutions report substantiated and non-substantiated expenses, most would just choose to report all as unsubstantiated. However his proposed language asks for mandatory third party substantiation. This is only proposed so that Evolution can be the “substantiator.”
• Evolution Benefits received a patent on a substantiation process in 2007. Should they convince you to pass this legislation their next move would likely be to file suit against competitors to enforce their patent and attempt to corner the market on HSA substantiation. Congress would become unwitting participants in the creation of a monopoly at the expense of their respective constituents, both individual and corporate, not to mention the extinction level event it will cause HSAs.
John:
Thought you might be interested in this info from our National Association of Health Underwriters on the Ways and Means action you mentioned yesterday.
[Note to Reader: Some portions of the text below paraphrase or borrow from the material found in the Roy Ramthun comment above.]
Dear NAHU Legislative Leaders,
I just wanted to provide you with an update about what happened at the Ways and Means Committee mark-up yesterday concerning the threat to HSAs. Just as we suspected, Democrats on the Committee included a provision in HR 5719, the Taxpayer Assistance and Simplification Act, that would require every single HSA disbursement be substantiated, similar to the way FSA disbursements are approved now by 2011. This language will provide great bureaucratic challenges to HSAs as we now know them and NAHU and our coalition partners are completely opposed to this measure. The entire bill, with the substantiation language included, was reported out of the House Ways & Means Committee this afternoon on a straight party-line vote of 24Y – 17N.
We expect that the legislation will be voted on by the entire U.S. House of Representatives within the next two weeks and today are launching an Operation Shout campaign to our entire membership (our previous campaign focused on Ways and Means Committee members only). If this measure does pass the House, its fate is uncertain in the U.S. Senate.
Rep. Paul Ryan (R-WI) led the Republican charge in opposition to the HSA substantiation provision. He questioned the large amount of revenue raised by the provision ($485 million over 10 years – now decreased to $308 because of the two year delay). According to staff on the Joint Tax Committee (who scores tax provisions for the Congressional budget), the number was derived based on two factors:
1. The IRS will be collecting more penalties on HSAs; and
2. Contributions to HSAs will go down.
The Joint Tax staff declined to specify how much of the revenue raised would come from penalties for unsubstantiated withdrawals and how much would come from decreased contributions to HSAs. They refused to say that there would be fewer HSAs — only that contributions would go down. They did agree however that the HSA substantiation provision would have a significant impact on the HSA market.
During discussion, Rep. Sam Johnson (R-TX) noted that the number of folks reporting non-medical spending was relatively consistent (i.e. – what’s the problem??). He stated that he did not think that HSAs should have the same rules as FSAs. Further he raised the issue of HIPAA privacy if banks are administering the accounts. Rep. Lewis (D-GA) noted that the two-year delay in implementation should be sufficient time to deal with those types of issues.
Rep. Paul Ryan (R-WI) offered an amendment to strike Sec. 17 (HSA substantiation). Rep. Cantor (R-VA) was a cosponsor of the amendment but not present at the mark-up. A number of Republican members spoke in favor of the Ryan amendment including Reps. McCreary (R-LA), Brady (R-TX) and Camp (R-MI).
The amendment fell on a near party-line vote of 24Y – 15N. Rep. Jon Porter (R-NV) was the only member of the GOP who voted with the Democrats against the Ryan amendment.
Evolution Benefits has now sent another letter to the Hill and has asked the Committee to withdraw their proposal. Can you believe it?
The White House on Monday threatened to veto a tax bill (HR 5719) because of a provision under which individuals with tax-free health savings accounts would have to provide evidence that they used funds in the accounts for medical purposes, CQ Today reports. Under the provision, individuals with HSAs after Dec. 31, 2010, would have to provide evidence that they used funds in the accounts for medical purposes. Current law allows use of funds in HSAs for nonmedical purposes, but the funds are taxed as income and assessed a 10% penalty in such cases. The Joint Committee on Taxation estimates that the provision would increase tax revenue by about $308 million over 10 years through collection of the penalties and decreased use of HSAs to defer or avoid tax payments. Republican lawmakers and companies that benefit from HSAs have criticized the provision, which they maintain would have negative effects for the seven million individuals with the accounts. According to a statement of administration policy from the White House Office of Management and Budget, the provision is “unnecessary for efficient tax administration, inconsistent with the flexibility purposely afforded HSAs at their inception, and could undermine efforts by employers, individuals and insurers to reduce health care costs and improve health outcomes by empowering consumers to take greater control of health care decision-making” (Rubin, CQ Today, 4/14).
[The following was sent out to customers of HSA Bank]
To all of our valued HSA relationships:
HSA Bank wants to alert you to a new tax bill, H.R. 5719, that is going to be voted on in the U.S. House of Representatives TODAY!
This law will likely double your monthly HSA administrative fees. HSA Bank is opposed to increasing your fees, but we will have no choice if this bill is passed by Congress and becomes law.
In addition, this new law would:
– eliminate the ability to get reimbursed out of your HSA when you want by check or at an ATM.
– force submission of your medical receipts to a third party in order for you to utilize the funds in your HSA.
The increase in fees will be for the third party to review your expense receipts. A corporation that has a patent on part of the process used to review your paper receipts asked Congress to pass this law.
We hope you will join us in telling Congress that HSA users are responsible taxpayers and don't need to pay a corporation to supervise their HSA spending. If you do not call, Congress will think HSA policy holders are in agreement with this new tax.
You can call (202).225-3121, which is the switch board at Capitol Hill and give them your zip code and they will transfer you to your U.S. Representative's office, or you can send them an e-mail by visiting your representative's website.
We recommend that you tell them the following:
I am a constituent and I live in _______ (name of your town) and I am opposed to Congress doubling the costs of my HSA in H.R. 5719, the "Taxpayer Assistance and Simplification Act of 2008." I am a responsible taxpayer and forcing me to pay more fees for my HSA does not assist me at all, and forcing me to submit my expenses to a third party is complicating my HSA, not simplifying it. I want my Congressman or Congresswoman to vote NO.
HSA Bank is working hard to keep your HSA affordable; please join us by taking a few minutes to help. Please contact them as soon as possible since they will be voting on the bill today!
Sincerely, HSA Bank