Health Savings Accounts: What's the Problem? What's the Solution? Part 1

The House of Representatives recently approved a number of changes that would improve the function and use of Health Savings Accounts (HSAs).  Lots of good ideas there.  This is Part 1 – What’s the Problem?  In a second blog, What’s the Solution, I will offer some suggested changes.    

Before we explore potential problems with this proposed legislation, here is a summary of the provisions included in H.R. 6199 and H.R. 6311, which were passed in the House of Representatives in July: 

• A HSA-qualifying health option may provide up to $250 (single) / $500 (non-single) of first dollar coverage for certain services (e.g., chronic disease management, such as diabetes testing strips);
• A HSA-qualifying health option may offer direct primary care service arrangements;
• Employers may offer employment-related, on-site or retail clinic services (e.g., physicals, drug testing, vision or hearing screenings) without disqualifying the HSA-qualifying health option; 
• A spouse’s coverage under a health Flexible Spending Account (FSA) (subject to certain reimbursement limits) will not disqualify a worker’s HSA-qualifying health option; 
• Allows conversion of funds from a health FSA and/or Health Reimbursement Account (HRA) to fund the HSA. 
• HSA qualifying medical expenses would again include certain over-the-counter medical products that have not been prescribed and would also include certain qualified sports and fitness expenses up to certain dollar limits.  
• Permits the carryforward of health FSA account balances (up to 3 times the annual FSA contribution limit) to the next plan year, coordinated with the health FSA cafeteria plan contribution limit in the next plan year; 
• Allows individuals entitled to Medicare part A by reason of being over age 65 to contribute to HSAs;
• Increases the maximum contribution limit to HSAs to the aggregate deductible and out-of-pocket limitation (for 2018, $6,650 for self-only coverage and $13,300 for family coverage);
• Allows both spouses to make catch-up contributions to the same HSA; 
• Permits HSA distributions for certain medical expenses incurred before the establishment of the HSA;
• Amends the HSA definition of a high deductible health plan to include bronze and catastrophic plans;
• Allows all individuals purchasing health insurance in the individual market the option to purchase a lower premium copper (catastrophic) plan; and
• Delays the effective date of the excise tax on insurers so that it does not apply for 2020 and 2021.

What’s The Problem?
None of the current proposals offer changes that would address the real issue:  access to HSA-qualifying coverage and HSA savings rates.¹ Simply put, most American workers are missing out on the most valuable benefits tax preference offered in the tax code!

As you may know, many academics and public policy experts believe America has a “retirement savings crisis”.  Many assert this is a “coverage” issue.  However, Congress successfully addressed the retirement savings “coverage” issue – 35+ years ago!²  
However, we DO have a retirement funding crisis – employers and individual workers don’t take full advantage of contribution opportunities.³  While multiemployer and public employer underfunding of pension commitments is substantial, and while worker contributions to employer-sponsored plans and Individual Retirement Accounts are often inadequate, no retirement-related liability is less well funded than employer promises of retiree medical coverage!⁴  

Most workers have no retiree medical savings.  This lack of access to employer-sponsored retiree medical coverage and the lack of employer and/or individual funding of future retiree medical costs is not surprising since employment and turnover trends confirm that most workers won’t retire from their current employer.⁵  So, retiree medical is “remote” and subject to hyperbolic discounting by both the employer and the worker.⁶  Also, over the past 35 years, we’ve seen federal laws and accounting changes that reduced tax preferences and increased required financial disclosures⁷ - which, in turn, triggered a curtailment of employer-sponsored retiree medical coverage.⁸   

Let me reconfirm that there is nothing wrong with the current HSA legislative proposals.  However, in Part 2, I will suggest some modest changes that will substantially improve opportunities for workers to fund current and future medical out of pocket and insurance costs.    

¹J. Towarnicky, The HSA In Your Future, Defined Contribution Retiree Medical, Parts 1, 2 and 3, April – June 2018, Accessed 7/30/18 at: https://www.psca.org/blog_jack_2018_25, https://www.psca.org/blog_jack_2018_29, https://www.psca.org/blog_jack_2018_30   
²The Economic Recovery Tax Act of 1981, Pub.L. 97-34, 8/13/81.  Accessed 7/30/18 at: https://www.govtrack.us/congress/bills/97/hr4242  See also:  J. Towarnicky, Retirement in America - Individual Account Retirement Savings Plans ARE Good Enough! 07/05/18.  “And, if America has a retirement crisis today, it is not because individual account retirement savings plans are inadequate. IRAs have been in place for every wage earner since 1982. For today’s median wage workers who was age 25 in 1982, even if she never had access to an employer sponsored defined benefit pension plan nor a retirement savings plan, had she saved the IRA maximum each year until reaching age 66 in 2023, earning only a 5% annual return, her monthly income (combined with Social Security) would be sufficient to replace 90+% of pay! Yes, every American Baby Boomer has had access to a more than adequate, tax preferred retirement savings plan.”  Accessed 7/30/18 at: https://www.psca.org/blog_jack_2018_33 
³Pension Benefit Guarantee Corporation (PBGC) Fiscal Year 2017 Annual Report: Multiemployer Program Deficit Widens to $65.1B; Single-Employer Program Continues to Improve, Deficit Narrows to $10.9B, 11/16/17, Accessed 7/30/18 at:  https://www.pbgc.gov/news/press/releases/pr17-10  See also:  American Legislative Education Council, Unaccountable and Unaffordable, Unfunded Public Pension Liabilities exceed $6 Trillion!  2017, Accessed 7/30/18 at: https://www.alec.org/app/uploads/2017/12/2017-Unaccountable-and-Unafford... See also:  ICI Factbook, 2018.   “Investment returns and rollovers from employer-sponsored retirement plans, more than new contributions, have fueled the growth of IRAs. For example, the Internal Revenue Service Statistics of Income Division reports $473 billion was rolled over to IRAs in tax year 2015, compared with $64 billion that was contributed. Although most US households are eligible to make contributions to IRAs, few do so. Indeed, only 12 percent of US households contributed to traditional or Roth IRAs in tax year 2016 and very few eligible households made “catch-up” contributions (the additional contributions individuals aged 50 or older are allowed to make).”  Accessed 7/30/18 at:  https://www.ici.org/pdf/2018_factbook.pdf  
⁴R. Pozen, Unfunded Retiree Healthcare Benefits Are the Elephant in the Room, 8/5/14, Accessed: 7/30/18 at:  https://www.brookings.edu/opinions/unfunded-retiree-healthcare-benefits-... See also:  A. Munnell, J. Aubry, C. Crawford, How Big a Burden are State and Local OPEB Benefits, March 2016.  “… the total OPEB unfunded liability … of $862 billion”  Accessed 7/30/18 at:  http://crr.bc.edu/wp-content/uploads/2016/03/slp_48.pdf 
⁵J. Towarnicky, Retirement in America – A Life Of Poverty?, 06/29/18, Accessed 7/30/18 at: https://www.psca.org/blog_jack_2018_32   ⁶G. Lubin, S. Lebowitz, 58 cognitive biases that screw up everything we do, 10/29/15, Accessed 7/30/18 at:    https://www.businessinsider.com/cognitive-biases-2015-10#hyperbolic-disc...   
⁷Tax Equity & Fiscal Responsibility Act of 1982, Pub.L. 97-248, 9/3/82, Section 116: Medicare payments secondary for older workers covered under group health plans.  Accessed 7/30/18 at:  https://www.gpo.gov/fdsys/pkg/STATUTE-96/pdf/STATUTE-96-Pg324.pdf  See also: Deficit Reduction Act of 1984, Pub.L. 98-369, Section 511, 7/18/84, which added Internal Revenue Code Sections (IRC §§) 419, 419A, Accessed 7/30/18 at: http://www.legisworks.org/GPO/STATUTE-98-Pg494.pdf  See also:  See also:  FAS 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions (Issued 12/90), Accessed 7/30/18 at:  https://www.fasb.org/summary/stsum106.shtml  See also:  FAS 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – An Amendment of FASB Statements No. 87, 88, 106, and 132(R), Effective in 2006 – 2007, Accessed 7/30/18 at: https://www.fasb.org/summary/stsum158.shtml   ⁸Kaiser Family Foundation, 2017 Employer Health Benefits Survey, September 2017.  The percentage of large employers offering retiree health coverage has declined from 66% in 1988 to 25% in 2017.  Accessed 7/30/18 at:  https://www.kff.org/report-section/ehbs-2017-section-11-retiree-health-b... See also:  P. Fronstin, N. Adams, Employment-Based Retiree Health Benefits: Trends in Access and Coverage, 1997‒2010, October 2012, Accessed 7/30/18 at:  https://www.ebri.org/pdf/briefspdf/EBRI_IB_10-2012_No377_RetHlth.pdf