Expanding HSAs

The current version of the House tax bill contains significant changes that would impact HSA participants. Notably, the bill as drafted would allow seniors to continue contributing to an HSA even after being enrolled in Medicare Part A if they are enrolled in a high-deductible health plan (HDHP). Under current law, contributions are prohibited after Medicare enrollment. The draft would also include the ability to use HSA funds to pay for gym memberships and other similar physical exercise costs (capped at $500 per year). The legislation would also allow two spouses to make each of their $1,000 catch-up contributions (available starting at age 55) to the same HSA. The changes would expand HSA eligibility so that an individual would be HSA-eligible if they are enrolled in any Bronze or Catastrophic plan on the health insurance marketplace and would allow HSA funds to be used to pay for direct primary care membership fees.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about the changes to HSAs contained in the House-passed draft tax legislation.

Below is a summary of the debate that ensued between the two professors.

Their Votes:





Their Reasons:

Byrnes: HSAs provide an extremely powerful tool for helping Americans cover the increasing costs of out-of-pocket health care expenses. We should be doing everything possible to expand their use and give Americans the largest tax break possible when it comes to health care expenses. The current draft tax legislation provides powerful new benefits to allow taxpayers to fund their pre-deductible health-related costs.

Bloink: Yes, HSAs are incredibly valuable when it comes to helping middle-income taxpayers afford ever-increasing out-of-pocket health care expenses. Still, the proposed expansion would primarily benefit the highest income taxpayers in the end, this expansion tilts the legislation's benefits even more heavily in favor of the highest income Americans, to the detriment of lower-income taxpayers. We really should be doing more to help the lower and middle-income taxpayers who need help funding pre-deductible health costs the most.

__________________________________________

Byrnes: We should all understand that the age-65 cutoff for HSA participation is completely arbitrary. Americans work past age 65 all the time in today’s society. Medicare beneficiaries particularly often have a difficult time covering their health-related costs when they’re older and have left the workforce. By expanding the tax benefits of HSAs to include Medicare beneficiaries, we’re giving even older Americans a powerful tax incentive to maximize their savings for unexpected health-related costs down the line.

Bloink: The proposal as drafted would provide the largest benefit for taxpayers who have the means to fund their out-of-pocket health expenses with current income, allowing the funds in their HSA to grow tax-free over time--essentially functioning like another tax-preferred retirement account. Middle- and lower-income participants, on the other hand, are likely to be forced to drain those accounts almost immediately to cover the current costs of their medical bills.

__________________________________________

Byrnes: Even with comprehensive health insurance, Americans are faced with a real problem: the amounts they're expected to cover in order to meet their deductible are often unaffordable. The pre-deductible costs associated with high deductible health plans can prevent taxpayers from getting the medical care they need, and the HSA is the tool that helps them get a tax break to help ease the burden of these costs.

Bloink: Again, yes, HSAs are powerful health savings vehicles that offer significant tax incentives to save for retirement. Still, we shouldn’t be focused on creating yet another tax-favored savings option for the wealthiest taxpayers. Instead, we should turn our focus toward helping those Americans who are actually struggling to cover their health costs save for out-of-pocket health expenses—both now and in the future.