An already mounting trend toward greater use of health savings accounts (HSAs) could accelerate under Republican plans to reshape how Americans pay for their medical care, putting a spotlight on tax-advantaged HSAs, how they work and how they could change.
HSAs, introduced in 2003 under former President George W. Bush, held nearly $37 billion in assets at the end of 2016, up 22% from a year earlier, according to a survey by Minneapolis-based consulting firm Devenir.
Those assets were spread out over an estimated 20 million accounts, up 20%.
Devenir projected that the HSA market will likely exceed $50 billion in assets — a 10-fold increase from a decade earlier — and 27 million accounts by the end of 2018.
These accounts must be paired with high-deductible health plans, which often carry lower premium costs.
For 2017, health plans with deductibles of at least $1,300 for single people and $2,600 for families qualify. The annual contribution limit this year is $3,400 for individuals and $6,750 for families.
HSA members age 55 and older can contribute an additional $1,000. The account balance rolls over every year.
Steve Neeleman, founder of HSA administrator HealthEquity, said that, ideally, most or all of the money a consumer saves on a low-premium health plan is put into an HSA.
The substantial benefit of this route, he said in an interview, is that such money is saved pretax and, if used for qualified medical expenses, is withdrawn tax-free.
By extension, an HSA member's overall tax liability is reduced.
The idea is to strengthen HSA members' finances, giving them more to spend on the health costs they face before hitting their deductible limits.
How HSAs Work
HSA members can tap their accounts tax-free to cover most common health costs, including doctor and outpatient services, hospital and inpatient treatments, prescription drugs and Medicare premiums.
Employers that offer HSAs can contribute to the accounts on behalf of employees.
Americans can also choose to manage HSAs on their own, separate from their employers.
One can contribute to more than one HSA, but the total contribution cannot exceed the annual limit.
Members own their HSAs and keep them when they change jobs, switch insurance plans or retire. Members can also invest HSA funds, and interest on invested balances is earned tax-free.
These are the key ways in which HSAs differ from health reimbursement arrangement plans and flexible spending accounts.
With HRAs and FSAs, one cannot invest the money and the employer owns the accounts.
If a consumer structures an HRA as a high-deductible HSA-qualified plan, then that person can use both.
There are several restrictions on using both an HSA and an FSA, but if a person has a limited-purpose FSA that covers only certain expenses, such as dental costs, then both accounts can be used simultaneously.
One can use an HSA to pay for a dependent's qualified medical expenses as long as such costs are not reimbursed by another health plan.
Growth In HSA Accounts
Neeleman, whose Draper, Utah-based firm administers 2.7 million HSAs with about $5 billion in assets under management, said business steadily grows every year as demand builds and employers are increasingly choosing to offer high-deductible insurance plans to minimize costs.
HealthEquity reported HSA growth of 28% in 2016 and asset expansion of 37%, showing that not only are more Americans using HSAs but they also are investing more money in these accounts.
Of the overall HSA market's growth, Neeleman added, "We think it's a steady march every year."
Economists say HSA growth likely would hasten even more if Republican President Donald Trump and allies in the GOP-controlled Congress are able to revamp or repeal Obamacare and create a new program that would curb federal spending on health care in favor of a system based more on tax credits.
"That kind of change could well open a door" for the expansion of HSAs, Christopher Probyn, chief economist at State Street Global Advisors, said in an interview.
He noted that replacement plans are light on details to date, but Republicans in Congress have specifically called for raising the limit on tax-advantaged contributions that Americans can put into HSAs and easing qualifications for participation in such accounts.
HSAs And Health Reform
The goal, as House Speaker Paul Ryan posits in a reform plan he champions, is to put more control of — and responsibility for — health spending into the hands of consumers.
The premise is this: When people are making decisions about care with their own money, they are more likely to thoroughly study their options and select plans that best suit their specific situations.
They will invest in what they need, pushing insurance companies for more options.
This, the thinking goes, will stoke competitive pressures and lead to more affordable options. Critics of the current system, known as ObamaCare, say it has failed to rein in soaring health care costs.
Moreover, with more responsibility for their health spending, Americans also are more likely to opt for less-expensive generic drugs, for instance, and are more likely to seek low-cost preventive care in hopes of avoiding expensive treatments in emergency rooms and hospitals, further helping to contain overall costs.
Paul Fronstin, director of health research and education at the Employee Benefit Research Institute, a nonpartisan public policy research organization in Washington, said in an interview that it is "highly likely" that any Republican reform law would include efforts to grow HSA use. He said every GOP proposal to date calls for this.
Speaker Ryan has called for raising the individual HSA contribution limit to $6,550 from $3,400 and the family limit to $13,100 from $6,750.
President Trump wants to add an additional wrinkle — making HSAs part of a member's estate so that they can be passed on to heirs without a tax penalty.
Currently, an HSA inherited from a spouse does not face a so-called death tax, but one passed on from someone other than a spouse is included in the heir's income and therefore taxed.
Health Savings And Retirement
Also of note, when HSA members turn 65, they can withdraw money for nonqualified medical expenses and pay only regular income taxes on that money. Before turning 65, they pay income taxes and a 20% penalty.
In retirement, HSA members can continue to use their accounts tax-free for out-of-pocket health expenses, and when they enroll in Medicare, they can use their HSAs to pay Medicare premiums, deductibles, copays, and coinsurance.
They cannot use HSAs to pay for Medicare supplemental insurance, but they can use these accounts to pay their share of employer-provided retiree medical costs.
Sam Pappas, a portfolio manager for the Retirement Planning Company of New England Inc., said in an interview that HSAs are increasingly in use among an aging population, and retirees are watching the health care reform debate closely.
He thinks retooling or replacing ObamaCare could take several months at a minimum, and likely will spill deep into next year, given the complexities of the health care system.
But he agreed that any new plan is bound to include motivators to expand use of HSAs.
"They will play an even more prominent role," Pappas said.