House Republicans in their planned replacement for Obamacare want health savings accounts to play a larger role in how Americans pay for health care.
Provisions of the newly unveiled American Health Care Act will nearly double the contribution limits for health savings accounts and give people more flexibility in how they can spend money in these tax-advantaged accounts.
Congress' Joint Committee on Taxation estimates the provisions for expanding health savings accounts will cost $19 billion through 2026. The committee puts the total 10-year cost of repealing the Affordable Care Act, more commonly known as Obamacare, at $594 billion because the GOP plan repeals taxes on high earners that partially pay for the law.
These estimates do not include the cost of repealing the individual and employer mandates or the cost of the replacement tax credits in the House GOP plan, according to the Committee for a Responsible Federal Budget, a nonpartisan fiscal watchdog.
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, such as doctor's visits, prescription drugs and dental care.
For older account holders, you can use your HSA to pay for Medicare premiums and out-of-pocket expenses including deductibles, co-pays and coinsurance (except Medigap).
If you use an HSA to pay for unqualified medical expenses, the tax penalty is 20 percent, unless you are 65 or older. At that age, 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 currently they must be 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.
The House GOP bill will increase the annual limit on HSA contributions to match the annual deductible and out-of-pocket expenses under a high deductible health plan. That means the HSA contribution limit could be at least $6,550 for individuals and $13,100 for families beginning next year.
The American Health Care Act also makes HSA rules more flexible by:
- Allowing both spouses to make catch-up contributions to one HSA beginning in 2018.
- Permitting 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.
- Letting people use their HSAs to pay for over-the-counter medications, which was restricted under Obamacare.
If approved by the House, the bill would still need to pass the Senate, which has a slimmer Republican majority and no consensus on an Obamacare replacement plan. Republican Sens. Bill Cassidy of Louisiana and Susan Collins of Maine have introduced a bill to create Roth HSAs (funded with after-tax dollars) to help people pay health insurance premiums and out-of-pocket costs.