Over the past month, the main news coming out of Washington has been the process to nominate of Judge Kavanaugh to the Supreme Court. In fact, it can seem that the nomination process has taken all of the Senate’s time and energy. However, Senators also have a number of House Bills to review, consider, and bring to the floor for a vote. Two bills, in particular, could significantly change how millions of Americans pay for healthcare.
The bills propose to change the structure of Health Savings Accounts (HSA) in regard to who can use one and how they can be used. To understand how these changes will impact individuals, it’s helpful to review the current rules for HSA eligibility, contributions, and withdrawals.
Current HSA Eligibility Restrictions
Health Savings Accounts were first made available to individuals and families beginning in 2004. Though the original idea was to make these accounts available to anyone, the final legislation restricted the establishment of an HSA as follows; account holders:
- Cannot be enrolled in Medicare;
- Cannot be claimed as a dependent in the tax year immediately preceding enrollment
- Must carry an “HSA-qualified” health insurance plan–namely a High Deductible Health Plan (HDHP) with a minimum deductible set at $1,350 for individuals and $2,700 for families;
- Could be disqualified from making contributions to an HSA if they or their spouse carried supplemental coverage, such as a Flexible Spending Account (FSA); Health Reimbursement Account (HRA), or a Direct Primary Care (DPC) service arrangement.
These restrictions remain today, however legislators have sought to change some of the above criteria with the recent passing of two bills:
- Restoring Access to Medication and Modernizing Health Savings Accounts Act (H.R. 6199)
- Increasing Access to Lower Premium Plans and Expanding Health Savings Accounts Act (H.R. 6311)
Proposed Changes to HSA Eligibility
Among the changes proposed to HSA accounts in H.R. 6199 and H.R 6311, the bills would expand HSA eligibility to individuals in cases where:
- As a working senior, the account holder participates in Medicare Part A and is covered by a qualifying HDHP.
- The account holder participates in a DPC service arrangement;
- The account holder’s spouse carries supplemental coverage, such as an FSA or HRA;
- The account holder’s employer provides supplemental health services through onsite or retail medical clinics.
The goal of these changes is to provide employers with more flexibility as it relates to building health benefits packages for employees. For employees, it means having greater access to healthcare benefits that fit their unique needs and situations.
While the expansion of HSA eligibility would likely increase the number of individuals who establish an HSA account, the two bills also propose to loosen restrictions on how HSA participants can contribute to HSA funds.
Current Restrictions on HSA Contributions
The amount that an individual can contribute to an HSA has always been capped for families and individuals on annual basis. Currently those contributions are as follows:
- For individual plans, the cap is $3,450.
- For family plans, the cap is $6,900.
- Those 55 and older can contribute an additional $1,000 to the above limits.
The source of these contributions is limited to the individual or employer, and an HSA participant cannot contribute or “roll over” funds from an FSA or HRA to an HSA.
Proposed Changes to HSA Contributions
In H.R. 6311, the HSA contribution limits would be increased to match the current combined annual limit on out-of-pocket and deductible expenses for an HSA-qualified insurance plan.The proposed limits are as follows:
- For individual plans, the cap would be $6,650.
- For family plans, the cap would be $13,300.
- Those 55 and older could continue to contribute an additional $1,000 to the above limits.
Additionally, the bill proposes to expand the sources for HSA contributions, and the following sources could be utilized to contribute to an HSA:
- Spouses over the age of 55 could contribute $1,000 above an account holder’s plan limit, annually.
- At an employer’s discretion, employees with FSA or HRA funds could transfer balances from those accounts to an HSA when the employee is enrolled in a qualifying HDHP. Transfers would be limited to $2,650 for individuals and $5,300 for families.
While H.R. 6311 mainly focuses on helping HSA participants to maximize their healthcare savings by raising contribution limits and expanding the ways in which to contribute, H.R. 6199 seeks to increase expand the definition of “qualified medical expenses.”
Current Restrictions on HSA Withdrawals
The use of HSA funds has always been restricted to “qualified medical expenses” as defined by the IRS (see: IRS Publication 502, “Medical and Dental Expenses”). Since 2010, these qualified expenses have excluded a number of items and services which could very well be interrupted as a genuine medical expense. Rather than focus on the long list of covered expenses, it’s easier to look a the new expenses that would be allowed under the proposed legislation.
Proposed Changes to HSA Withdrawals
The following items would represent an expansion of “qualified medical expenses.”
- First Dollar Coverage Flexibility for an HDHP would provide coverage for services before the deductible is met up to $250 a year for an individual and $500 a year for family coverage. This change will allow insurers to provide coverage for and incentivize the use of high-value services that can reduce health care costs more broadly, such as primary care visits and telehealth services.
- Inclusion of Certain Over-The-Counter Medical Products as Qualified Medical Expenses removes the Affordable Care Act’s restriction on over-the-counter medicines for all tax-favored health accounts and adds “menstrual care products,” as a qualified medical expense for the purposes of these accounts.
- Qualified sports and fitness expenses are treated as qualified medical expenses up to a limit of $500 a year for an individual and $1,000 a year for a joint return. This includes amounts paid for membership at a fitness facility, participation or instruction in a program of physical exercise or physical activity, or safety equipment for use in a program of physical exercise or physical activity.
HSA Changes Need Senate Approval
To become law, the house bills will need to be passed by the Senate. As mentioned, this will be a challenge considering the Senate’s current focus on the Supreme Court nomination and federal spending legislation. Furthermore, the upcoming midterm elections will likely delay and–depending on the outcomes–influence the future direction of the bills.