New HSA Bills Could Be a Game Changer for Retirement Savers
Last month the House of Representatives passed two bills that would make significant changes to HSAs, or health savings accounts, such as a large increase in the amount of tax-deferred contributions that could be made to them and the number of people who qualify to use them. These changes could not only allow Americans to get more of a tax deduction for their healthcare expenditures, but they could also help participants build their retirement nest eggs at a faster rate.
The bills, H.R. 6199 and H.R. 6311, are broader than the versions passed by the House Ways and Means Committee earlier this month and integrates various sections of the other bills approved by the committee in early July. Both of the GOP-backed bills received some crossover support from Democrats despite the committee’s previous party-line approval (22-16) of the roster of bills earlier in the month. Here is a breakdown of the two bills:
H.R. 6199, renamed the Restoring Access to Medication and Modernizing Health Savings Accounts Act and passed by a margin of 277-142, would:
- Reverse the Affordable Care Act’s (ACA’s) prohibition on using tax-favored health accounts to purchase over-the-counter medical products.
- Treat menstrual care products as qualified medical expenses that could be purchased with all tax-advantaged health care accounts.
- Treat certain sports and fitness expenses–including gym memberships and the cost to participate in certain physical exercise programs–as qualified medical expenses up to a limit of $500 a year for an individual and $1,000 a year for a family.
- Allow high-deductible health plans (HDHPs) to cover up to $250 (self-only) and $500 (family) annually for nonpreventive services that currently may not be covered predeductible. This would let HDHPs cover outside the deductible, albeit on a limited basis, chronic-condition treatment and telehealth services, for example.
- Permit individuals with HSA-qualifying family coverage to contribute to an HSA if their spouse is enrolled in a medical flexible spending account (FSA), currently a disqualifying scenario.
- Allow limited use of employer onsite medical clinics and other employment-related health services without risking HSA eligibility.
- Protect HSA-eligible individuals who participate in a direct primary care (DPC) arrangement from losing their HSA eligibility and allow DPC provider fees to be covered with HSAs (capped monthly at $150 per individual and $300 per family).
H.R. 6311, renamed the Increasing Access to Lower Premium Plans and Expanding Health Savings Accounts Act and passed 242-176, would allow the ACA’s premium tax credit for low and moderate earners to be applied when buying lower-premium, “catastrophic” copper plans; let people over age 30 buy copper plans; and allow copper and bronze-level individual and small-group market plans to qualify for HSA contributions. The bill also would make these modifications to tax-advantaged accounts:
- Raise HSA contributions to $6,650 for individuals and $13,300 for families, which is the combined annual limit on out-of-pocket and deductible expenses under an HSA-qualified insurance plan in 2018. Currently, for 2018, HSA contribution limits are $3,450 for individuals and $6,900 for those covered under family medical plans.
- Permit HSAs to pay for qualified medical expenses as of the start of HDHP coverage if the accounts are opened within 60 days after coverage under a HDHP begins.
- Allow working seniors participating in Medicare Part A and covered by a qualifying HDHP to contribute to an HSA.
- Permit spouses over the age of 55 to make an annual catch-up contribution (an extra $1,000) to an HSA that’s linked to a health plan providing family coverage. Currently, only the account holder can make an annual catch-up contribution.
- At an employer’s discretion, allow employees with an FSA or a health reimbursement arrangement (HRA) who enroll in a qualifying high-deductible health plan with an HSA to transfer balances from their FSA or HRA to the HSA. Transfers would be capped at $2,650 for individuals and $5,300 for families.
- Permit health FSA balances to be carried over to the following plan year. This rollover could not exceed three times the annual FSA contribution limit.
Wait! Why does the HSA limit matter for retirement savings?
The HSA has a number of features that makes this account type an excellent retirement savings tool, as well as a great way to help manage healthcare costs. These include:
- HSA contributions are tax deductible. Also, any withdrawals for qualified healthcare expenses are tax-free. HSAs are the only tax-advantaged accounts that offers this type of double tax benefit.
- After you contribute, you can invest your HSA funds in a variety of investment options, similar to a 401(k).
- HSA funds carry over from year to year, so any funds that you don’t use to cover healthcare expenses (and the investment returns they generate) can accumulate in the account.
- Once you turn 65, you can withdraw HSA funds penalty-free for any reason. So you can use them in the same way you’d use any other retirement savings.
- After 65, withdrawals will be considered taxable income, just as in a traditional IRA or 401(k), unless they are used for healthcare costs. The average 65-year-old couple can expect to spend $275,000 on healthcare expenses throughout their retirement, so there should be plenty of opportunities for HSA funds to be used completely tax-free in retirement.
If participants choose to use their HSA as a retirement savings vehicle, the proposed higher HSA contribution limits could allow them to significantly increase their tax-advantaged retirement savings while maintaining the flexibility to use their money for healthcare expenses if they need it sooner. And after retirement, participants can use HSA funds on a double-tax-advantaged basis to help cover their healthcare cost burden. It’s important to note that to be eligible to use an HSA to save you need to have a qualifying high-deductible (at least $1,350 for an individual or $2,700 for a family) health plan.
Support from SHRM, Advisors, and Healthcare Experts
The two bills were met by applause from both advisers and healthcare experts alike around the country. Investment advisers were happy to see the House action due to the rise in popularity of HSAs among their clients. “We’re encouraging it, and for the most part our clients are taking advantage of HSAs,” said John Jespersen, lead financial adviser for Buttonwood Financial Group. “From a fiduciary perspective, it makes sense to empower individuals to take greater responsibility for their health care,” he noted. Meg Reilly, Fidelity vice president for policy communications, also indicated that Fidelity Investments were also in favor of the move. “Proposals that would increase contribution limits and allow for spousal catch-up would position HSAs as an even more valuable tool for health savers,” she wrote in an email.
“Health care has evolved,” Paul Fronstin, director of the Health Research and Education Program at the Employee Benefit Research Institute, told ThinkAdvisor.com recently. “HSA plans have had these restrictions on them that may not make sense anymore.” The bill gives employers “more flexibility on what is subject to the deductible,” Fronstin said. “One thing holding [employers] back is they don’t love the inflexibility of the [HSA] plan design,” Fronstin added, noting a Kaiser Family Foundation survey which found that only 17% of employers offer an HSA. “These changes will provide employers with greater flexibility to design benefit offerings to meet the needs of their employees and their families [and] … retain and recruit talent,” said Chatrane Birbal, director of the Society for Human Resource Management’s (SHRM’s) congressional affairs, health and employee benefits policy. “SHRM fully supports the repeal of the restrictions on the use and limits on contributions to health savings accounts and flexible spending accounts.” As health costs have increased for workers and employers alike, HSAs and FSAs “can enable thousands of businesses to continue offering employment-based health coverage.”
Senate Approval Needed
The only hurdle left now for the two bills is passage in the Senate, of course. House Ways and Means Committee Chairman Kevin Brady stated after the bills’ passage in the House that “as Republicans continue to work towards comprehensive health care reform, the House is taking action to enact targeted policies that expand access to HSAs, lower costs and premiums through increasing choices.” Brady urged the Senate to take up the bills soon. There is a lot in these bills that should make both sides of the political spectrum happy, so there’s a realistic chance that they could make it through the Senate in the not too distant future and become law.
To find out more about HSAs, how they might be a good option for you, and how we can help you utilize them, call us at info@yourretirementadvisor.com.
