Health Savings Accounts: What's the Problem? What's the Solution? Part 2

In our prior post, the House of Representatives recently approved a number of changes that would improve the function and use of Health Savings Accounts (HSAs). Those proposals have a lot of good ideas but do not address the real problem -- access to HSA-qualifying coverage and HSA savings rates. In part 2, we offer a few suggestions that might significantly increase access to and contributions to Health Savings Accounts.    

What’s the Solution?

In 2003, tax-favored Health Savings Accounts were added as IRC §223. HSAs offer workers the opportunity to save for current and future out of pocket medical expenses and certain medical and long term care insurance premiums.¹

While the past 15 years have seen substantial growth in HSA “coverage,” almost 80% of American workers are not eligible!²  Worse, only a subset of workers who are eligible actually enroll in the HSA-qualifying health option. Worse still, many who are enrolled in the HSA-qualifying health option fail to open up a HSA. Even worse, only some of that group actually contribute to their HSA. Finally, only a subset of that group contribute enough to have investable assets to prepare for future medical expenses and insurance premiums.³ 

Bottom line, if there is a “retirement savings crisis,” it continues to be a retiree medical funding crisis.    

Let me reconfirm that there is nothing wrong with the current HSA legislative proposals.  

But, Congress might also consider:

• 401(h) for 401(k) – Amend IRC§401(h) so that individual account retirement savings plans (like the 401(k)) can add a tax-preferred “sidecar” retiree medical account to accept employer contributions (such sidecar accounts have been permitted in pension plans since IRC §401(h) was added to the tax code in 1962).  
• Opt-Out of Medicare Part A - Allow workers who have qualified for non-contributory Medicare Part A coverage the same opt out option for Medicare’s Hospital Insurance coverage that is offered to workers who paid less taxes and did not qualify for non-contributory Medicare Part A coverage. 
• Cadillac Tax & HSA:  Confirm that Congress’ use of different language was intended to exclude all contributions to Health Savings Accounts, whether made through a cafeteria plan or directly, from the calculation of cost for Cadillac Tax purposes.⁴    
• ERISA Does Not Apply:  Clarify/confirm that ERISA does not apply where employers increase HSA participation and contributions by adopting cafeteria plans and automatic enrollment features.   

Finally, Congress may want to consider, similar to the 1981 legislation (as adjusted by the Tax Reform Act of 1986), a proposal that would make every worker eligible to contribute to an individual Health Savings Account where their modified adjusted gross income is less than a specific dollar limit.⁵   

I am always interested in your ideas on new retirement savings innovations.  Send them to me at:  [email protected]

¹Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub.L. 108-173, 12/8/03, Accessed 7/30/18 at:  https://www.congress.gov/bill/108th-congress/house-bill/1  
²P. Fronstin, Has Enrollment in HSA-Eligible Health Plans Stalled? Employee Benefits Research Institute, 2/16/18, Accessed 7/30/18 at: https://www.ebri.org/pdf/briefspdf/EBRI_IB_441.pdf  
³America’s Health Insurance Plans (AHIP), Health Savings Accounts and High Deductible Health Plans Grow as Valuable Financial Planning Tools, 4/12/18, Accessed 7/30/18 at: https://www.ahip.org/2017-survey-of-health-savings-accounts/  See also:  Devenir, 2017 Year-End Devenir HSA Research Report, 2/22/18, Accessed 7/30/18 at: http://www.devenir.com/research/2017-year-end-devenir-hsa-research-repor...
⁴Compare IRC §4980(I)(d)(2)(B) which includes contributions to Health Flexible Spending Accounts including “… the amount of employer contributions under any salary reduction election” versus IRC §4980(I)(d)(2) which does not mention “salary reduction” and specifically includes “…employer … contributions (under) section 106).
⁵The Economic Recovery Tax Act of 1981, Note 3 Supra.  See also:  Tax Reform Act of 1986, Pub.L.99-514, 10/22/86.  Section 1101 limits tax deductible contributions to IRAs for individuals who participate in pension plans if their income exceeds certain limits - up to $73,000 of Modified Adjusted Gross Income (2018) for a single taxpayer, up to $121,000 married filing jointly.  Accessed 7/30/18 at: https://www.congress.gov/bill/99th-congress/house-bill/3838/text