Replacing ObamaCare: Republican Alternative Expands HSA Access
This is the second in a multi-part series exploring the Republican Study Committee’s proposal for replacing ObamaCare.
As we reach the climax of the CR stalemate centered around ObamaCare, the debate will eventually have to shift away from the endless evils of government-driven health care and toward the redeeming power of free-market forces. Fortunately, the Republican Study Committee recently introduced a comprehensive health care proposal titled the American Health Care Reform Act of 2013 (AHCRA). The bill, H.R. 3121, both repeals ObamaCare and offers the best set of proposals to date toward establishing a consumer-driven health care narrative for replacing ObamaCare.
Last week I addressed AHCRA’s first core principle, the Standard Deduction for Health Insurance (SDHI), which would unchain the tax advantages for purchasing health insurance from employer-sponsored coverage. This post focuses on the benefits of enhancing the health savings account (HSA) to unleash the power of the market in combating the skyrocketing costs of care.
HSA Provides Triple-Tax Advantage
With health FSAs, HRAs, and HSAs, the current state of consumer-driven health savings vehicles is a confusing alphabet soup of complex tax laws. So here’s what matters: The HSA is by far the best of the bunch. It gives you total control of the assets in your own personal trust account with its unique triple-tax advantage. Contributions are made on a pre-tax basis (by payroll deduction) or tax-deductible (above the line), funds held in the account grow tax-free, and distributions for qualified medical expenses are tax-free. That’s as good as it gets. You can also use any balance to supplement retirement savings because HSAs allow penalty-free distributions upon reaching age 65.
AHCRA Making a Good Thing Better
AHCRA builds on the solid HSA foundation currently in place by expanding both the eligibility to contribute to HSAs and the types of health expenses that qualify for tax-free distributions.
Some of the highlights include:
- Addressing the Medicare/Social Security Entanglement: In order to contribute to an HSA, you must be covered only by a qualifying health plan known as a High Deductible Health Plan (HDHP). Coverage under any other form of health insurance will bar you from contributing to an HSA. The problem for seniors is that current law requires anyone who is Medicare-eligible and receiving Social Security benefits to enroll in Medicare Part A (hospital insurance), which is not an HDHP. The U.S. Supreme Court recently refused to hear a court challenge to this trap. The result is that anyone age 65 and over wishing to claim Social Security benefits loses their ability to contribute to an HSA. AHCRA fixes this flaw from an HSA perspective by preventing Medicare Part A entitlement from barring HSA eligibility.
- Increasing the HSA Contribution Limit to Match Out-of-Pocket Max: Current law limits annual HSA contributions to $3,250 for self-only coverage and $6,450 for family coverage. However, this amount represents only roughly half of the potential out-of-pocket costs you might incur each year under a HDHP. The HDHP out-of-pocket maximum is currently $6,250 for self-only coverage and $12,500 for family coverage. AHCRA nearly doubles the amount that HSA-eligible individuals can contribute by matching the limit with the maximum HDHP out-of-pocket costs, which are indexed for inflation.
- Health FSA and HRA Rollover to HSA: Health FSAs are subject to the use-it-or-lose it rule, which requires near-psychic ability before the plan year to make a proper election. It also creates perverse incentives to increase medical spending at the end of the year to prevent forfeitures. HRAs (which are employer funded) can have their balance roll over from year to year, but their portability is limited to an incomprehensible COBRA process after you leave the job. AHCRA alleviates this issue by reviving a previous law that allowed employees to perform a qualified HSA distribution to roll over unused FSA and HRA balances to an HSA. (Note: Unfortunately, this AHCRA provision also appears to follow the previous law by limiting the rollover opportunity to once per lifetime.)
- More HSA Qualified Medical Expenses: Under AHCRA, HSA qualified medical expenses are expanded to include payment of HDHP coverage premiums (currently health premiums generally qualify only if for COBRA or while receiving unemployment). It also would add up to $1,000 per year of exercise equipment and physical fitness programs or nutritional and dietary supplements to the list of general tax deductible medical expenses for itemized deductions and all types of health accounts.
- More Preventive Care Expenses: HDHPs must first subject all covered expenses to the deductible paid by the participant before the plan pays any amount in benefits. The one exception is preventive care, which the HDHP can offer with first-dollar coverage not subject to the deductible. AHCRA expands the list of preventive care services to include over-the-counter medications that prevent worsening of or complications from chronic conditions.
- Child HSAs: This is an interesting idea. AHCRA would allow parents to establish and contribute up to $3,000 per year to an HSA for their children before they reach the age of 5. The parent gets the tax deduction and controls the account until the child reaches age 18. This would allow the tax-free fund to grow over a long period for the child’s medical expenses, much in the same manner as a 529 plan for college expenses.
HSAs are the best building block for a consumer-driven health care system. According to AHIP, the number of Americans with HSA/HDHP coverage rose to nearly 15.5 million in January 2013, up from 13.5 million in January 2012 and 11.4 million in January 2011, and representing a 15% annual growth rate. Sadly, ObamaCare’s government-driven health care model threatens to turn the tide strongly in the opposite direction. AHCRA’s repeal of ObamaCare and improved HSA access would further increase the utilization of the accounts and improve their consumer-driven benefits on the cost of coverage and care.