How the New Health Savings Account Bill Could Affect You
Despite failure to pass a major overhaul of the U.S. health care system, Congress has been making progress in reforming niche aspects of the industry that now constitutes almost one-sixth of the U.S. economy. In July, the U.S. House of Representatives passed two health care bills that made changes to health savings accounts (HSA) that could make it much easier to save money for medical expenses.
If you aren’t familiar with them, health savings accounts are pre-tax accounts that allow you to set aside a certain amount from your paycheck for future medical expenses. These HSAs have grown in popularity as more people have enrolled in high deductible health plans. The Employee Benefit Research Institute estimates that there were 5.5 million health savings accounts in the U.S., with almost $11.4 billion in assets at the end of 2016.
How Health Savings Accounts Work
In 2003, President George W. Bush signed into law the Medicare Prescription Drug, Improvement, and Modernization Act which created health savings accounts. The new law allowed people with high deductible health plans to set up an HSA either through their employer or independently. Eligibility criteria for a health savings account includes
• Enrollment in a high deductible health plan
• Not enrolled in Medicare
• Have no supplemental health insurance policy
• You cannot be claimed as a dependent
In essence, health savings accounts are reserved for pre-retirement, working adults.
Deposits into health savings accounts are made prior to taxation, allowing you to earn interest on funds that would normally go to local or federal governments. In some cases, employers may also make contributions to health savings accounts. In 2018, the annual contribution limit into a health savings account for an individual was $3,450 and $6,850 for a married couple. If you are over 55, this limit is raised by $1,000.
If you deposit into a HSA one year and do not withdraw them, you may roll those funds over into the next year. These rollover amounts do not count against the annual contribution limit. If you lose eligibility for a health savings account, you cannot continue to make deposits, but you may keep unused funds in the account.
In 2006, Congress enacted the Tax Relief and Health Care Act of 2006 that allowed HSA account holders to move funds from an IRA to a health savings account. This can only be done once in a lifetime. Also, funds in a HSA may also be invested and accrue dividends or interest. This return on investment is not taxed until the funds are withdrawn for use.
If withdrawn funds are used for qualified medical goods or services, they are not taxed as income. HSA funds may be used for insurance premiums and out-of-pocket expenses. If funds are used for purposes other than medical expenses, then they are subject to income taxes, as well as a 20 percent penalty.
Proposed Changes to Health Savings Accounts
This past July, the U.S. House of Representatives approved bills H.R. 6199 and H.R. 6311 that proposed major changes to health savings accounts. If approved by the Senate and signed into law by the president, then the new law would make the following changes:
• HSA funds could be used to purchase over-the-counter medications without a doctor’s prescription (currently a prescription is required for drug purchases)
• Menstrual care products would now qualify for HSA funds
• Gym memberships and other fitness programs may qualify for HSA funds, up to $500 for an individual or $1,000 for a couple
• Annual contribution limits would now equate to the annual deductible and out-of-pocket limits on HSA health plans. In 2018, that would raise the contribution limit to $6,650 for an individual or $13,300 for a couple.
• Seniors on Medicare Part A and a high deductible health plan may continue to make deposits into a health savings account
• Taxpayers may not enroll in a health savings account even if they are also enrolled in a medical flex savings account. Currently FSA enrollees are prohibited from also having a HSA.
• Double enrollees may transfer funds from a FSA to a HSA if approved by their employers. This transfer amount is capped at $2,650 for an individual or $5,300 for a couple per year.
Additionally, these bills would promote the use of health savings accounts because they would broaden the definition of what is a high deductible health plan. They would also promote better health by allowing use of $250 for an individual or $500 for a family on medical services prior to reaching the annual deductible; this would better enable users to utilize preventive care that is usually cheaper and more robust.
The Outlook for These New Bills
Although H.R. 6199 and H.R. 6311 have passed the House, they must still find support in the Senate and White House. The Senate has previously killed health care reform bills including two measures last year that would have abolished the Affordable Care Act. However, these latest proposals are not sweeping changes that could detriment millions of voters like last year’s bills; the new bills allow greater flexibility and more financial protection on a voluntary basis.
The new House proposals have garnered widespread support from industry analysts and financial services groups. For example, Meg Reilly of major financial company Fidelity Investments spoke up in favor of the bills: “Proposals that would increase contribution limits and allow for spousal catch-up would position HSAs as an even more valuable tool for health savers.”
On the other hand, there could be partisan resistance. Many Democrats have criticized the bills for bolstering health savings accounts which favor the wealthy and those with enough surplus income to set aside. Critics argue that these changes could cost taxpayers $92 billion while allowing the rich to shelter more income in tax-free accounts. Some have even suggested that the new bills would be undermining critical health care programs like Obamacare, Medicare and Medicaid.
To learn more about health savings accounts, please visit Boost Health Insurance.
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