When the U.S. Senate unveils its bill to replace Obamacare Thursday, it's fair to expect the legislation will seek to expand the benefits of health savings accounts.
Senate Republicans plan to unveil the text of their draft health-care bill as senators struggle over issues such as the future of the Medicaid program for the poor and bringing down insurance costs.
An estimated 23 million people could lose their health care under the House plan, according to the non-partisan Congressional Budget Office.
"Most of the debate in the Senate is around the Medicaid and tax credit pieces of the legislation," said Steve Wojcik, vice president of public policy at the National Business Group on Health, which advocates for large employers. "The HSA enhancements are not very controversial and no one has really spoken out against them."
HSAs, introduced in 2003 during President George W. Bush's administration, 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.
"It's [the] best tax-advantaged vehicle to save for medical expenses and for other expenses in retirement," said John Young, senior vice president of consumerism at Alegeus, a technology company that helps employers provide HSAs to their workers.
For example, while 401(k) plan contributions are subject to the FICA tax, which funds Social Security and Medicare, the money you put into an HSA is not.
HSAs are not a fix for the health-care system or the lack of health literacy in this country.John Youngsenior vice president of consumerism at Alegeus
Provisions of the American Health Care Act, which passed the House by a narrow 217-213 vote May 4, will nearly double the contribution limits for HSAs and give people more flexibility in how they can spend money in these tax-advantaged accounts.
When lawmakers revamped the American Health Care Act to win enough Republican votes to pass the House, the provisions dealing with the expansion of HSAs were left largely untouched.
Though top senators are writing their own health-care bill, key lawmakers in the debate are supportive of boosting the benefits of HSAs. For example, Senate Finance Committee Chairman Orrin Hatch, R-Utah, sponsored legislation earlier this year that would increase HSA contribution limits in the same way as the American Health Care Act.
Boosting benefits for HSAs is not a cheap proposition. Congress' Joint Committee on Taxation estimates provisions in the American Health Care Act that expand HSAs will cost $19 billion through 2026. But whatever happens in Washington, D.C., HSAs will become a bigger part of how many people pay for and save for health care.
HSAs continue to grow
HSAs have grown to an estimated $37 billion in assets and 20 million accounts at the end of last year and reached $41 billion in assets during January, according to Devenir, an HSA consulting firm in Minneapolis.
Given the momentum, Devenir forecasts assets in the accounts could reach more than $53 billion by 2018, a 20 percent increase from this year. (See chart below.)
A drawback of HSAs is that 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 this year. Next year, those maximums rise to $6,650 for individuals and $13,300 for family coverage.
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. Next year, under current law, you can contribute up to $3,450 for individuals and $6,900 for families.
The American Health Care Act proposes increasing 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 $6,650 for individuals and $13,300 for families beginning next year.
The House bill 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 the Affordable Care Act.
- Lowering the tax penalty if you use an HSA to pay for unqualified medical expenses to 10 percent, from 20 percent. (If you're 65 or older, you can withdraw from an HSA penalty-free, but you do not get a tax break if you use the money for something other than health care.)
Roughly three-quarters of people who have HSAs withdraw less than they contribute. People who invest their HSA money in stocks and bonds have an average balance of $14,000 compared with $2,500 for those who keep it 100 percent in cash, according to recent research from Fidelity Investments based on data from the accounts it administers.
How to pick an HSA
You don't have to wait on Congress to open an HSA.
Unlike flexible spending accounts, you don't have to "use it or lose it" with an HSA each year. Around a quarter of HSA owners don't touch any money from their accounts, according to Fidelity.
Your employer may direct you to sign up with its 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.
Given the tax advantages, HSAs should be a key part of your retirement savings strategy, said Young at Alegeus. He recommends that people save in a workplace retirement plans up to the employer match, then maximize their HSA contributions and put any remaining savings in 401(k) plans or other investment accounts.
Devenir estimates that about 10 percent of the roughly 20 million HSA account holders have a balance of $5,000 or more and 4 percent of people are using their HSAs as investment plans. Many HSA providers require that you have at least $1,000 in your account before you can invest.
How should people invest their HSA money? Generally, you should have enough cash in your HSA to cover expected medical expenses and invest the rest, according to Fidelity. Here are some portfolio guidelines Fidelity uses for its HSA account holders based on age:
HSAs can travel with you if you change jobs or insurers. Use HSASearch, which is run by Devenir, to comparison shop for more than 320 providers. As with any retirement account, fees and investment options matter.
If Congress increases the benefits of HSAs, it will be helpful to savvy savers, but may not do much for the uninsured.
"HSAs are not a fix for the health-care system or the lack of health literacy in this country," said Young.