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Obamacare repeal may birth a new retirement account

The end of the Affordable Care Act could mean the rise of a new kind of tax-advantaged investment plan: the Roth health savings account (HSA).

Republican Senators Bill Cassidy of Louisiana and Susan Collins of Maine have drafted a bill to create the Roth HSAs to help people pay health insurance premiums and out-of-pocket costs, as part of a plan to replace Obamacare.

However, critics worry that Roth HSAs don't go far enough to provide health care to the uninsured.

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"It is being proposed as an Obamacare replacement, but it's really providing tax-sheltering opportunities rather than increasing health care coverage," said Edwin Park, vice president for health care policy at the Center on Budget and Policy Priorities, a liberal think tank.

Pros and cons of a Roth HSA

To understand the trade-offs of a Roth HSA, you have to know how regular HSAs work.

HSAs, introduced in 2003, offer you triple tax advantages: First, contributions are tax-deductible. Second, those contributions can be invested and grow tax-free. Third, withdrawals aren't taxed as long as you use them for qualified medical expenses.

If you use an HSA to pay for unqualified medical expenses, the tax penalty is 20 percent, unless you are 65 or older. That is when you can take money out for whatever you want, but the withdrawals will still be subject to regular income taxes.

A drawback of HSAs is that they are paired with a high-deductible health plan. Such a plan means you'll have to pay a deductible of at least $1,300 for individual coverage and $2,600 for families. The maximum annual out-of-pocket costs for these plans are $6,550 for individuals and $13,100 for families.

In 2017, you (and your employer) can contribute up to $3,400 to an HSA for individuals and $6,750 for families. Account holders age 55 and older can contribute an extra $1,000.

You also can use your HSA to pay for Medicare premiums and out-of-pocket expenses including deductibles, co-pays and coinsurance (except Medigap).

Under the Cassidy-Collins plan, Roth HSA contributions would not be tax-deductible, cutting off one leg of the triple advantage. However, unlike regular HSAs, you wouldn't need a high-deductible health plan to qualify for a Roth HSA — and you could pay health-insurance premiums with the account.

"Using a Roth HSA to pay premiums sounds good, but since the average HSA has a balance of $2,000 you would quickly exhaust the account," said Eric Remjeske, president and founder of Devenir, an HSA consulting firm in Minneapolis.

Remjeske, who favors expanding HSAs as part of health care reform, prefer Congress would focus on options that "are a little more realistic and doable."

Other HSA proposals on the table

The Cassidy-Collins plan that includes Roth HSAs is just one of many Republican options to repeal and replace the Affordable Care Act. Calls for comment to the senators' offices were not returned.

President Donald Trump proposed that HSAs "would become part of the estate of the individual and could be passed on to heirs without fear of any death penalty" during the presidential campaign.

Currently, there is no tax penalty for HSAs inherited from a spouse, but those inherited from someone other than a spouse are included in an heir's income.

House Speaker Paul Ryan and fellow Republicans want to increase the HSA contribution limits to the maximum out-of-pocket limits for high-deductible health plans. So if those rules were in effect next year, the individual HSA limit would rise to $6,550 from $3,400, and the family contribution limit would grow to $13,100 from $6,750.

House Republicans also want to allow spouses to make catch-up contributions to the same HSA account, and permit qualified medical expenses incurred before HSA-qualified coverage begins to be reimbursed from an HSA as long as the account is established within 60 days.

How to pick an HSA

Unlike the flexible spending accounts, you don't have to "use it or lose it" with an HSA.

In fact, more than three-quarters of HSA account holders withdrew less than they contributed, and 24 percent didn't touch any money from their accounts, according to a 2015 Fidelity Investments analysis of the more than 500,000 accounts it administers.

Devenir estimates that about 10 percent of the roughly 18.2 million HSA account holders have a balance of $5,000 or more and 4 percent of people are using their HSAs as investment plans.

Your employer may direct you to sign up with their preferred HSA provider, but if you are enrolled in a qualified high-deductible health plan, you can choose whatever provider you want. However, if employers only offer matching HSA contributions to their preferred provider, it makes sense to stick with them.

HSAs can travel with you if you change jobs or insurers. Just like with any retirement account, fees and investment options matter.

Use HSASearch, which is run by Devenir, to comparison-shop for more than 320 providers. Most HSAs will require that you have at least $1,000 in the account before you can begin put money into investing options, such as stock and bond funds.

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