The U.S. Senate's Better Care Reconciliation Act keeps all the provisions from the House of Representatives' health-care bill that increase the benefits of health savings accounts.
"We are delighted to see that the expansion of HSA contribution limits, the lowering of the penalty for non-medical use, and all other provisions in the House bill were left intact for the Senate version," said John Young, senior vice president of consumerism at Alegeus, a technology firm that helps companies offer HSAs to the market.
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," Young said. 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.
The Senate and House bills make 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.)
"These changes are welcomed by employers," Shandon Fowler, senior director of employer portfolio strategy at benefits administrator Benefitfocus. "Overall, they give employers more flexibility to drive employees to make the best choices for themselves and their families."
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 Better Care Reconciliation 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.