How Would GOP Healthcare Reform Affect HSAs?

GOP Efforts Would Increase Contribution Limits and Expand Access to Funds

GOP reform proposals would expand access to HSA funds and increase contribution limits
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It's no secret that Republican lawmakers want to expand access to health savings accounts (HSAs), increase their utilization, bump up the amounts that people can contribute to HSAs, and allow greater flexibility in terms of how people can use the funds they accumulate in the accounts. It's unclear at this point if or when they'll accomplish this, but it's a position they've been pushing for years.

The GOP healthcare reform debate has swirled in Congress throughout 2017. Although numerous pieces of legislation to repeal and replace the Affordable Care Act have been introduced—culminating on July 28, 2017, in the Senate's rejection of all the bills they were considering—virtually all of them have taken a similar approach to changing HSAs.

With the demise—for the time being—of the legislative efforts to repeal and replace the ACA, the GOP proposals for HSA reform may be put on a back burner for a while. But it's possible that HSA reform could be part of an eventual bipartisan compromise on health care reform, and it's also possible that HSA reform could be enacted as stand-alone legislation at some point, independent of the major changes that both political parties would like to make to the American healthcare system.

HSAs Underwent Minor Changes With the ACA

Health savings accounts were created by the Medicare Prescription Drug, Improvement and Modernization Act of 2003, and became available for consumers as of 2004.

The ACA did make some modest changes to HSAs:

  • HSAs have a penalty if you withdraw funds for non-medical use before you're 65. That penalty used to be 10 percent, but the ACA increased it to 20 percent (this is in addition to the taxes that are assessed if the money is used for non-medical purposes). The penalty is intended to ensure that money in HSAs is used as it's intended: for medical purposes (after age 65, an HSA can function like a traditional individual retirement account, with taxes—but no penalty—assessed if the money is withdrawn to cover non-medical expenses).
  • All medications—except insulin—must have a doctor's prescription in order to be purchased with HSA funds (i.e., to use the tax-free money in your HSA to buy them). In the past, over-the-counter medications could be purchased with HSA funds, but the ACA changed that.

Republican HSA Reform Would Expand Access and Contribution Limits

Most of the bills that Congressional Republicans have introduced to repeal and replace the ACA include provisions that would change some of the rules that apply to HSAs. This is a central tenant of GOP healthcare reform, so much so that HSA reform was even incorporated in the 8-page "skinny" repeal bill (the Health Care Freedom Act) that Senate Republicans introduced in late July 2017 (that measure did not pass, as three Republicans opposed it).

Although the reform proposals have varied somewhat, there are four central components of HSA reform that GOP lawmakers would like to implement:

  • Reverse the ACA's penalty increase, and go back to a 10 percent penalty for under-65 withdrawals for non-medical expenses.
  • Reverse the ACA's provision that prevents over-the-counter medications from being purchased with HSA funds.
  • Increase the HSA contribution limits, and allow spouses aged 55 and older to make catch-up contributions to the same HSA, rather than having to have separate HSAs, as is currently the case.
  • Allow HSA funds to be used to pay health insurance premiums. Currently, you can only pay premiums with HSA funds if it's for COBRA, long-term care insurance, Medicare Part B premiums (and Part A if you don't get it for free), and health insurance premiums incurred while you're receiving unemployment compensation. GOP reform proposals would allow people much more latitude to use HSA funds to pay health insurance premiums.

Most of that is fairly self-explanatory, but let's take a closer look at the contribution limits. The money that a person deposits in an HSA is tax-free (either deducted before taxes are calculated if the contribution is payroll deducted, or deducted on a filer's tax return). As is the case with other tax-advantaged accounts, there's a limit on how much you can contribute to an HSA. In 2017, it's $3,400 if you have self-only coverage under an HSA-qualified high deductible health plan (HDHP), and $6,750 if you have family coverage under an HSA-qualified HDHP (note that you can only contribute money to an HSA if you currently have coverage under an HSA-qualified HDHP).

The IRS also limits the out-of-pocket costs for health insurance plans that are considered HSA-qualified HDHPs. Most of the GOP proposals to reform HSAs call for increasing the HSA contribution limit to equal the maximum out-of-pocket under an HSA-qualified HDHP (i.e., so that the amount you can put into the tax-advantaged account to cover potential medical costs would be the same as the maximum amount you would have to pay in out-of-pocket costs under your health insurance plan).

For reference, the maximum out-of-pocket under an HSA-qualified HDHP in 2017 is $6,550 for a single individual and $13,100 for a family (note that this is lower than the out-of-pocket maximums that apply to other types of coverage). So if the proposed reforms were to be implemented, people would be able to contribute nearly twice as much to their HSAs compared with the current rules, which confers a nice tax break for people who can afford to put that much money into the account. It also helps to ensure that people are better prepared to face the financial implications of a serious illness or injury if they have money in an HSA. But of course, that's all dependent on the person having enough money to contribute in the first place.

This proposal is not without critics. Higher contribution limits for HSAs don't help low-income households, since they generally aren't able to contribute even the current allowable amounts. And for high-income households, the higher contribution limits essentially make HSAs more of a tax shelter, allowing people to put aside even more pre-tax money that can grow tax-free and eventually be used as a supplemental retirement account.

Although virtually all of the GOP reform proposals for HSAs have pegged proposed contribution limits to HDHP out-of-pocket maximums, it's noteworthy that Senator Rand Paul (R, KY) introduced legislation in early 2017 that would simply have removed the HSA contribution cap altogether, allowing people to contribute unlimited amounts to an HSA. This proposal didn't go anywhere, but it would clearly have been a tax shelter for the wealthy.

Will HSA Reform Stall With the ACA Repeal Effort?

HSA reform has been a key provision of Republican health care reform efforts for years, and it's clear that Republican leaders want to see more people using HSAs, higher contribution limits, and more flexibility in terms of how the funds are used.

GOP lawmakers made a hard push for ACA repeal in the first half of 2017, but that effort stalled in late July. It's unclear whether there will be a renewed bipartisan approach to healthcare reform, or a lull in these efforts while lawmakers address other issues.

But HSA reform is something that could gain bipartisan support in Congress, and it's also something that could potentially be done on its own, without a full overhaul of U.S. healthcare regulations.

Democrats are likely to want to maintain the ACA's higher penalty on under-65 withdrawals from HSAs for non-medical expenses, since the purpose of an HSA is to ensure that funds are available if and when medical expenses arise.

Democrats (and most Republicans) are obviously not going to go for a proposal as extreme as Senator Paul's unlimited contribution idea, but a modest increase in contribution limits is something that could get bipartisan support. It would be costly for the federal government, however, due to lost tax revenue—as with any tax cuts, that is an obstacle that would have to be addressed.

Allowing people to pay health insurance premiums with HSA money is also an idea that could garner bipartisan support, in an effort to make it easier for people to pay premiums (it's worth noting, however, that the average HSA balance is fairly low; people would have to contribute more to HSAs in order to make them a viable funding source for premiums).

A Word From Verywell

Regardless of how HSAs are reformed, they are not a panacea for the problems that face the U.S. healthcare system. They don't help low-income people to obtain insurance or afford care, and although high deductible health plans do reduce utilization of health care (thus bringing down costs), the reduced utilization is of both necessary and unnecessary services. Reduced utilization of necessary services (eg, a person splitting pills to make them last longer in order to save money, but thus not complying with prescribed treatment) is generally not good for long-term health outcomes.

So although a bipartisan approach to healthcare reform could certainly include modest changes to HSA rules, a fully HSA-centric approach to healthcare reform is not likely to garner support from Democrats in Congress, or from patient advocates.

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