Attack on HSAs

The U.S. Senate Committee on Finance has proposed new changes to Health Savings Accounts (HSAs) that could make them less attractive in the future. These options are only "proposed" so they are open for discussion.  Here's what you need to know about what these provisions would do to HSAs.

First, the Committee is proposing to reduce the amount you can contribute to your HSA each year by going back to the old rule which limits your annual contribution to the amount of your deductible for your HSA-qualified insurance plan.  Today, you can contribute up to $5,950 to your HSA for your family ($3,000 for singles) regardless of the level of your HSA plan deductible.

Second, the Committee is debating whether to impose a limit on the amount of health care benefits available through employers that is tax-free to employees.  This limit could apply to both the full cost of health insurance provided by the employer and contributions to health care accounts such as HSAs.  For example, if the Committee sets a limit of $13,000 for tax-free benefits, any combination of insurance plus HSA contributions that exceeds $13,000 would be taxable.  On the other hand, if one's employer-sponsored health insurance costs $12,000, then the maximum HSA contribution would be only $1,000, even if you had a deductible above that amount. (See the previous paragraph.)

Third, the Committee is considering requiring that your employer or an independent third party certify that any withdrawal from your HSA is for a qualified medical expense. If the withdrawal is not certified, even if it was for a legitimate qualified expense, the withdrawal would be subject to income tax and a tax penalty. This would greatly increase the administrative burden of HSA plans and make them less attractive to employers and maybe employees as well.

Fourth, the Committee wants to raise the tax penalty from 10% to 20% on withdrawals from an HSA for nonmedical purposes.  This is in addition to the income taxes due on any non-qualified withdrawals (if under age 65).

Finally, the Committee is thinking about changing the definition of a "qualified medical expense" to remove over-the-counter medicines (e.g., aspirin and other pain relievers, etc.) and medical products (e.g., band aids, anti-fungal creams and ointments, etc.).  This means you could not use your HSA funds tax-free to pay for these types of expenses, as you can today.  Unfortunately, this change would only allow you to pay with pre-tax dollars for prescription medicines and products in the future.

Comments (15)

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  1. Joe S. says:

    I’m afraid there are too many people in Congress who are hostile to HSAs. I fear the worst.

  2. Ken says:

    Agree. It’s time to circle the wagons and protect our gains.

  3. Bruce says:

    Does everybody remember Night of the Living Dead, where mindless zombies pursue the good guys?
    They’re back!

  4. Rick says:

    Bruce, as I recall the zombies won.

  5. Brian says:

    There is only one fly in the ointment that I have never seen addressed. Most people that find themselves un-insured cannot afford an HSA account. Tax-breaks at the end of the year? If you only have $200 a month to cover food, gas, and other nessecary living expenses—- tax credits won’t help and don’t help.

    This is the problem with most republican theories on health-care reform— they are not realistic. They do not take into account that the reason behind the uninsured are pre-existing clauses and basically the price of premiums which are beyond attainment for most of the working poor and those in poverty. NONE of the republican plans addresses this… just empty promises of reform which over the last 8 years ( same propositions by republicans), has resulted in an increase in premium costs and an increase in the amount of people un-insured not to mention those who are saddled with high premiums for inadequate coverage. Who thinks that someone making only 10 thousand a year can afford to pay an insurance company 6-7 thousand for no coverage at all? And if you miss one payment then you are cut and all that money down the drain for nothing. Until republicans can address the base issues rather than posture over HSAs or over tax credits, the problem will onlyu get worse- not better.


  6. says:

    I’ve never heard anyone propose an HSA for people with only $200.00 to cover food and other necessities. I’m self-employed and our high-deductable + HSA plan is perfect for our family of six. It forces us to control medical expenses rather than consume them.

    It’s simple economics. The only ways to make the cost go down is to decrease demand or increase supply. If people have more control over their expenditures and coverage then this is a step toward reducing costs. The opposite is, of course, single-payer “universal coverage” which will reduce supply, increase demand and make costs sky-rocket. It’s a common mistake to think that costs can’t get any higher merely because they are presently perceived as being very high.

  7. Ron Greiner says:

    I see no problems with these changes. Employer HSA deposits escape payroll tax of 15.3% and the current 10% penalty for nonmedical expenses is less.

    So the government gets less taxes on HSA funds used to buy beer than beer purchased with funds on their regular paycheck. These HSAs are magical.

    Brian, wake up. These are refundable tax credits. What 30-year-old uninsured male would not let the government buy his HSA insurance for $700 a year and then let the government deposit $1,600 into his “FREE” tax free HSA at the bank?

    Brian, I don’t know anybody that’s so broke that they can’t let the government give them $1,600, all tax free. You better bone up on HSAs before you make such goofy statements.

    John Edwards (D-NC) said HSAs only work for millionaires. Where does the liberal left get this stuff?

  8. James G. Knight MD says:

    In a down economy most retailers run sales; they don’t raise prices!

    The skyrocketing cost of health insurance will soon enable a filibuster-proof Democratic majority to destroy a dysfunctional but free market in health care, in favor of government-run/ socialized medicine, putting both the health insurance industry and health care providers at grave risk.

    Most puzzling is the fact that an obvious solution already exists that requires no new legislation; but key industry players are so consumed by trying to preserve their slice of the status quo that they apparently can’t or won’t see the one move that ultimately wins the game once and for all? Three hundred million Americans financially vested in their own health care futures will NEVER agree to government-run health care!

    To date, the largest barrier to increased market penetration of Health Savings Accounts (HSAs) has been the insurance industry’s refusal to price HSA qualifying coverage at lower rates that truly reflect the marked reductions in insured payouts inherent to high deductible plans. Sure protecting and if possible growing top-line revenue is great when you can do it safely, but the meltdown of the financial services industry over profitable but ultimately lethal sub-prime mortgage instruments ought to serve as a warning to any industry that pushing a pure revenue strategy to its infinite limit is just plain stupid. I would remind the industry of the old adage, “He who fights and runs away lives to fight another day!”

    The bulk of HSA deposits are derived from premium savings arising from moving from expensive 1st dollar coverage to much less costly high deductible plans. But, with insurers holding on tightly to the legacy overhead of “touching” every claim, and charging excessive premiums for inherently less expensive high deductible plans, employers and individuals just can’t realize enough savings to justify the transition en masse. The ongoing consumptive behavior and price insensitivity of 1st dollar coverage continues to grow out-of-control health care spending, adding more fuel to the political argument that the only solution is for the government to step in to heavy-handedly compel reduce insurance company profits and set lower provider fees.

    But what if the insurance industry were to forgo short-term profits in favor of long-term viability? What if the average $13,000 employee insurance premium were replaced by a $6,000 deductible HSA qualifying HDHP with $6,000 in premium savings going directly into each employee’s HSA? Day-to-day care would be totally free, on a pre-tax basis, and what employees didn’t spend they’d get to keep toward future health care needs or better yet toward what is clearly a very uncertain retirement future. Social security and Medicare are going bust to the tune of 30-50 trillion dollars, and the cost of health care in retirement for couples retiring today (based on existing Medicare coverage) is variously estimated at around $250,000+. Paying for health care in retirement from an IRA or a 401k requires significantly higher balances in those accounts because of the after-tax nature of distributions from those accounts as compared to HSAs. Thus, HSAs are the ideal way to save and invest for those costly and predictable expenses of old age.

    All physicians, especially primary cares, can help patients decide what health care services are really effective and necessary, and even help direct patients to the most cost-effective venues. Patients with HSAs ask about and pursue more affordable care. Again, three hundred million financially responsible health care consumers is a relentless force of nature that will quickly right-size the health care industry.

    The single-payer crowd may call these strategies “tired old ideas”, but in reality they are deathly afraid of the success of consumer directed health care in the marketplace as this would put their ultimate goal of government-run, socialized health care permanently to bed!

    All that remains to be seen is whether the health care industry will wake up in time to take advantage of the very short window of opportunity before opponents of free market medicine have their way with the country.

  9. Jerry says:

    Right on spot. The carriers have yet to price the HDHPs to reflect the savings from less risk—only in the very large employer market.

    We must collectively continue our private sector efforts to improve the efficiency and quality of the world’s most accessible health care delivery system–flaws and all. The consequences of not doing so will result in a total government take-over where free choice and abundance are replaced by rationed care and limited options.

  10. Florida RPh says:

    Is WMT telling Congress how successful their HSA plans are for their employees? So goes WMT, there goes everyone.

    I’m not suprised at this, I fully expected them to start taking ROTH IRAs first though.

  11. James G. Knight MD says:

    PS: Matching tax deductibility to out-of-pocket risk (the insurance deductible) is a tolerable set back in my view. I choose the highest deductible in order to create the most savings from which to fund my MSA/HSA. Increased price-sensitivity as a consequence of increased personal financial responsibility is what will right-size the health care market place; allowing a family a $2,200 deductible and a $5,950 contribution deduction merely offsets financial risk.
    I do expect this will reduce market penetration over the short-term, but if insurers start pricing HDHP more competitively, especialy for those choosing maximum allowable deductions/ OOPs, I think we will move more quickly toward solving the biggest proble – affordability.

  12. peter andrews says:

    DR Knight is right on. and the inefficiency of the federal government is another topic to fear. In Ct. they are trying to have all join the State pool but they only want to offer a low co-pay plan at a very high cost and have said no to any HDHP’s. they need the younger population of the small business owners and their employees in the state pool to stem the tide of runaway loss ratios from a group that goes to the doctor because they have too many sick days to use up and the co-pays are so low there is no incentive towards wellness and the loss ratios prove this.
    They all think that if this does really work it is no big deal then we can just go back… another incorrect assumption.
    They keep trying to fix the whole issue by looking at 100% of the population, instead of focusing on the 10% who don’t have coverage. Require the young to have coverage and expand the coverage for the unfortunate and we will have universal coverage at significantly less cost and without huge business disruption.

  13. Jon says:

    10% Peter? That’s another planet my friend. A better planet. Not a planet pretending to be another much much better planet.

  14. Tom Miroballi says:

    I sell health insurance to individuals, couples, single parents, families & corporations. I primarily sell the Health Savings Account plans & in most cases save my clients 40% to 50%+ by selling them a MORE COMPREHENSIVE, Tax Advantaged plan where they may use any doctor, any hospital & any dentist they want. Case in point, I have a group of teachers at a school in Chicago, Ill. They were paying $10,000 per month with thier old insurance broker who had the teachers in a group plan. I sold them the Health Savings Account plan, with lower deductibles, any doctor, any hospital, anywhere for $3,500 per month. This is a $6,500 savings, every month or for you math majors out there, 12 months x $6,500 = a $78,000.00 in annual premium savings. Please note that a 25 year old male, living in Chicago, Illinois only costs $114.00 per month for a 100% plan with an $1,150 deductible. With a $2,600 deductible it would only cost $90.00 per month and a $5,000 deductible would only cost $63.00 per month. His Group Plan cost was $381.00 per month so how can anyone say that the H.S.A. plans are bad? People with Pre-Existing health conditions can be covered under the State of Illinois Comprehensive Health Insurance Plan with Guaranteed Coverage. I save people thousands of dollars a year by placing them into a Health Savings Account Plan.

    The system is NOT BROKEN, it’s the typical Democratic solution to fix everything by raising our taxes to pay for another health insurance plan run by the government that is destine to fail just like Medi-care, Medi-caid.

  15. Ross Schriftman says:

    Congress is performing legislative malpractice. They actually should be promoting HSAs to generate MORE tax revenue. It is nearly impossible to spend more on a high deductible premium coupled with an HSA than it is for a dumb and expensive low copay plan. Employer groups going to a high deductible do it to reduce their costs hence lowering the tax exclusion for their share of worker’s premiums. Here are my talking points:
    H.S.A. Talking Points
    Prepared by Ross Schriftman, RHU, LUTCF, ACBC, MSAA
    Employee Benefit Specialist
    Kistler Tiffany Benefits
    Tel. 215-682-7075

    P.S. I personally have an HSA and love it and so do my clients.

    High Deductible Health Plans coupled with a Health Savings Account almost always result in less; not more of a tax break than what most Americans’ health plans provide today.

    The tax break according to the Senate Finance Committee report is calculated at 2/10th of 1% or about $500 million of the $194.2 Billion of total health care benefit tax breaks for 2008. This amount is hardly worth addressing as a part of the overall tax revenue issue.

    With the eminent financial collapse of Medicare without significantly raising taxes or slashing beneficiary benefits through much higher deductibles and copays, Americans will need to accumulate large sums of money to pay for their out of pocket expenses. Health Savings Accounts could end up saving the Medicare program by creating a Medical Individual Retirement Account.

    The nation/state of Singapore has a health savings type program that has been very successful in providing dollars for people’s care.

    Most High Deductible plans have better preventative benefits with less out of pocket than more “traditional plans.” Higher percentages of consumer driven health plan participants take advantage of these benefits and have a higher participation in getting needed screenings done according to many studies.

    Reducing premiums through high deductible plans allows participating Americans to better utilize their health care dollars for the care their specific families want and need.

    Reducing the amount available for annual contributions to the deductible will break the Administration’s promise that Americans can keep the same health plan they currently have.

    Why would the Congress and the Administration want to reduce the amount of money people can contribute for their health care needs? We should be encouraging savings. The amount of contribution is currently limited to $3,000 for a single and $5,950 and for only those people who have a qualified high deductible health plan for each month of the calendar year plus a $1,000 catch up provision for Americans 55 and over. This is hardly a significant “tax shelter.”

    If a person used the funds for other than 213d expenses, they not only would have to report this as income, but then they may not have funds to pay for medical expenses that are less than their deductible. This, rather than substantiation, is the key to discourage using funds for other than medical expenses.

    Requiring substantiation by employers will add costs to a plan and discourage employers from participating especially small employers. Many choose the Health Savings Account approach rather than a Flexible Spending Account or a Health Reimbursement Arrangement because they are currently not responsible for administrating the account; the account holder/patient is.

    Substantiation by an employer over an individual’s personal savings account should be considered a violation of HIPAA as well as financial privacy. My employer has no right to look at how I am spending my own personal funds. Small businesses will, by default, have to hire a Third Party Administrator to handle just the substantiation issue that, in some firms, amount to less than $10,000 per year. Few T.P.A.s will be willing to work on such small accounts without charging a significant fee defeating the savings element of the entire program.

    With estimated fraud and abuse of Medicare in the tens of Billions of dollars, why would tax committees in Washington want to focus their time on Americans who have several thousand dollars saved for their personal medical expenses?

    If a cap ends up being placed on the tax exclusion for employer provided health benefits, then more people will choose plans with higher deductibles. After all, that is one of the goals of placing a cap. So why would Congress take away the ability of people to accumulate personal funds to cover their out of pocket expenses?

    Lower income people benefit from health savings accounts as their contributions can be contributed on a pre-tax basis.

    Healthy people will eventually need funds to pay for their medical expenses at older ages when they do get sick. Putting funds away for this need will save future generations an enormous health care bill that is not currently funded in Medicare, Medicaid or any other government program.

    The one important person that seems to missing in all the health care reforms is the patient. Without patient involvement reforms are only addressing symptoms (i.e. higher health insurance premiums) and not the cause (health care utilization and price per service.) Health Savings is one of the best tools for patient/consumer involvement.