It’s tax day, April 17, 2018! Rather than give you the “accounting recommendations” to (1) open a Health Savings Account (or HSA) and (2) contribute the HSA maximum, we want to discuss the future of HSAs. What will tax day look like for an HSA in 2019 or 2025?
So here it goes…
The Future of HSAs — A Wish List of Changes.
1. Loosen or remove the insurance requirements.
An HSA requires individuals to have a qualified high deductible health plan (or HDHP) in order to contribute. Not only does this make HSAs an unlikely tax-time strategy, it limits who can take advantage of these benefits. Common problems that occur as a result of the specific insurance requirements include:
- Individuals have a high deductible health plan that doesn’t qualify. The requirements for a qualifying HDHP specifically state that the plan cannot pay any benefits, other than preventive care, before the deductible is met. Historically, this prevented some plans that offered a prescription co-pay benefit from qualifying. Recently, several states have mandated that certain services be covered before the deductible is met. The IRS provided temporary relief for these plans, but action will be required in the coming years.
- Individuals could have a qualifying HDHP but also be covered by a spouse’s plan. Some times “other coverage” is automatic under a spouse’s plan. For example, a spouse may have an HRA or FSA which covers the individual and makes them ineligible to contribute to an HSA.
- Individuals might receive government benefits, such as TRICARE, and wouldn’t be eligible to contribute to an HSA. This is a tricky one. You served your country and are receiving veteran benefits. This act of taking the benefits you earned prevents you from contributing to an HSA. There was some reprieve provided which allows you to suspend your TRICARE benefits while contributing to an HSA, but that may not always be a feasible option.
- Individuals may be gainfully employed at age 65 and be auto-enrolled in Medicare Part A, which indirectly makes them ineligible to contribute to an HSA.
2. Increase HSA Contribution Limits
HSA Contribution Limits are set by the IRS and are indexed annually for inflation. These limits are typically nearly half of the maximum out-of-pocket limit that an individual could experience. This provides a significant exposure for individuals that need it most. It also limits individual’s ability to save for medical expenses in retirement.
3. Expand what is eligible for HSA Distribution
HSAs are supposed to be about empowering consumers to make smart decisions and look for lower cost alternatives. Historically, over-the-counter medicines provided individuals with cost effective alternatives for managing common ailments like a cold, flu, allergies and more. Instead of making these items more accessible, Health Care Reform added the stipulation that OTC drugs must be prescribed in order to be reimbursed from benefit accounts like an HSA. Individuals are left to either (1) contact their physician for a prescription (likely paying more) or (2) effectively pay up to 40% more by paying with after-tax dollars.
4. Prevent HSAs from being treated like a Cadillac Plan
Health Care Reform in its original form includes a provision affectionately known as “The Cadillac Tax“. In its raw form, it was sold as a way to prevent employers from providing the highly compensated with “super rich” benefits. As the law was interpreted, it became a tax on average employees. Many union plans were in jeopardy. Contributions to HSAs and FSAs were expected to be included in the calculation. Many “silver” and even “bronze” plans in exchanges were likely to hit the thresholds to be classified as a “Cadillac Plan”. For once both sides of Congress were in agreement that the Cadillac Tax was a disruptive and costly idea. But, they still needed it from a revenue / taxation perspective.
So, what did they do?
They delayed the implementation from 2018 to 2022. But, it still looms out there. We recommend the complete repeal of the Cadillac Tax. If this cannot be achieved, we would like relief for HSA and FSA contributions from determining if the Cadillac Tax was met.
So what’s being done to shape the future of HSAs?
There have been several bills proposed aimed at expanding the use and flexibility of HSAs. While each bill has its own flavor and twist for the future of HSAs, many concepts have gained bi-partisan support. Only time will tell which of these (or even bills not yet proposed) will gain momentum.
H.R. 247 – Health Savings Account Expansion Act: Amends Internal Revenue Code to: increase maximum contribution amounts, permit use of HSAs to pay insurance premiums, repeal restriction on using HSAs for OTC medications, eliminiate the requirement that a participant in an HSA be enrolled in a high deductible health plan, and decrease the additional tax for HSA distributions not used for qualified medical expenses.
H.R. 35 – Health Savings Account Act of 2017: Allow for deduction for child/grand child, increase HSA maximum to match the maximum out-of-pocket limit, expand the definition of an HSA compatible plan to include all bronze, silver and catastrophic plans on an insurance exchange.
H.R. 1280 – Health Savings Account Act: Amends IRC Code to: increase HSA maximum contributions, allow individual to receive primary care services in exchange for a fixed payment to participant in an HSA, permit HSAs to be used for fitness center memberships.