Replacing ACA? Hard. Keeping HSAs? No Problem.
It is doubtful that there is a Republican in Congress who doesn’t support health savings accounts. HSAs were enacted as part of the Medicare Modernization Act of 2003, which extended drug coverage under Medicare. For many conservative Republicans, the HSA provisions were the only reason that they voted for a law they thought was expanding government spending in healthcare. Since then, Republicans have been tinkering with the law to increase the number of people covered by HSAs.
We now have a new bill to repeal the ACA, the American Health Care Act that passed in the House of Representatives on May 4, 2017. This new bill contains a number of provisions that are helpful to people who participate in HSA programs.
The AHCA eliminates some of the provisions in the ACA that adversely affected HSAs. For example, the ACA placed a restriction on reimbursing over-the-counter drugs by an HSA; the AHCA eliminates that restriction. The AHCA rolls back the tax for HSA distributions not used for qualified medical expenses to 10%, which were previously 20% under ACA.
In addition to repealing provisions of the ACA that adversely affected HSAs, the AHCA adds new provisions that will increase the attractiveness of having a high deductible health plan and contributing to an HSA. Some of those provisions are as follows:
Increasing limits: Many HSA participants were worried that they could not contribute enough to an HSA to fund the additional deductibles and co-payments required under a high-deductible health plan. Under the ACA, contributions to an HSA are limited by a monthly amount which is adjusted for cost of living increases — $3,450 for single coverage and $6,900 for family coverage in 2018. Under the AHCA, the maximum contribution to an HSA will be significantly increased to an amount equal to the sum of the annual deductible and the out-of-pocket expense maximum for single or family coverage. If passed into law, the AHCA’s maximum HSA contribution would increase from $3,450 to $8,000 for single coverage and from $6,900 to $16,000 for family coverage.
Playing catch up: Once an HSA participant reaches age 55, they are eligible to make an additional $1,000 catch-up contribution. Under current rules, if both spouses are over 55, they must make separate HSA contributions in their individual HSAs. Under the AHCA, this rule allows spouses who are HSA account holders to take advantage of catch-up contributions to one HSA rather than separate HSAs.
Falling ill too soon: The bill also fixes an issue that has vexed people who establish a new HSA. Namely, any medical expenses incurred after the coverage date of the HDHP will now be considered eligible medical expenses even if the expenses were incurred prior to the establishment of the HSA. This is effective so long as the HSA is established within 60 days of the date of coverage that the eligible HDHP begins.
These new provisions could spur the adoption of HSAs and HDHPs. Since the changes made as part of the AHCA will eliminate some of the obstacles that prevented people from embracing HSAs and HDHPs, passage of this bill will provide an opportunity for advisers and brokers to raise these option to clients.
Further, HSAs and HDHPs can be attractive in all segments of the insurance market, such as small and large businesses as well as the individual market. Eligibility to contribute to HSAs is not limited to employees; any individual who is covered by a qualifying HDHP has the ability to contribute to a HSA. And with the lower premium costs associated with a HDHP, small and medium-sized employers could gravitate to the increased savings opportunities provided to HSAs under the AHCA.
We recommend following the Senate's actions in crafting their version of healthcare reform legislation in order to know what provisions favoring HSAs and HDHPs will be included in their final version of the bill. These negotiations are being held behind closed doors in the Senate, so we will not know what is actually in the bill until Senate Republican leadership unveils the proposed legislation. But the provisions in the AHCA favoring HSAs and HDHPs will likely be in the final draft given the near universal support of these provisions by the Republican caucus.
With the legislative process on healthcare reform underway, one thing is certain: HSAs will be maintained and even expanded in the new law. Whether Congress can actually pass legislation and send it to the President is still under debate.