By Alex Hendrie, director of tax policy at Americans for Tax Reform
July 25, 2018
Since they were created in 2004, tax-advantaged Health Savings Accounts (HSAs) have become a successful tool toward promoting patient choice in health care.
HSAs are utilized in combination with a high deductible health plan and have proven to be a free-market health-care proposal that does not rely on mandates or cash subsidies. Today, 25 million American families and individuals save and spend their own money tax free on a variety of healthcare expenses — more than double the number of individuals that use ObamaCare exchanges.
Later this week, the House can take a huge step forward toward building on the success of HSAs in a way that will lower healthcare costs, expand individual freedom, strengthen retirement security, and further reduce taxes for middle class families.
The legislation — H.R. 6311, the “Increasing Access to Lower Premium Plans and Expanding Health Savings Accounts Act, and H.R. 6199, the “Restoring Access to Medication and Modernizing Health Savings Accounts Act” — contain numerous provisions to expand the scope and size of HSAs.
Most notably, these proposals would nearly double the contribution limit for an HSA from $3,450 to $6,650 for an individual and $6,900 to $13,300 for a family. The bills also expand access to HSAs by allowing working seniors enrolled in Medicare Part A to contribute to an HSA and allowing individuals with a bronze or catastrophic health plan to be eligible for an HSA. In addition, the proposals remove the ObamaCare restriction on using an HSA to purchase over-the-counter medications and expands HSAs to fitness expenses.
Combined, these proposals represent a much needed update to HSAs, which have a proven record in promoting consumer driven healthcare that lowers healthcare costs, increases savings, and strengthens retirement security.
HSA funds are completely controlled by the individual and follow them between jobs, giving individuals an incentive to more efficiently spend on healthcare goods and services. Because of this, families and individuals that utilize HSAs spend less on health care and use fewer medical services without forgoing necessary primary and preventative care.
Under the existing contribution limits, an HSA user can accumulate as much as $360,000 after contributing to an account for 40 years assuming a rate of return of just 2.5 percent, according to theEmployee Benefit Research Institute. With a rate of return of 5 percent, an HSA user can accumulate $600,000 over 40 years.
This makes them a vital tool to plan for retirement, as a couple aged 65 years old will need an average of $280,000 to cover health-care costs throughout their retirement, according to research by Fidelity.
This HSA package is also a significant tax cut for American families, as they offer triple tax benefits to users — contributions made are tax free, interest and investment is earned tax free, and payments made to qualifying health expenses are tax free.
The proposals being considered by Congress this week total over $40 billion in lower taxes over the next decade, according to the Joint Committee on Taxation.
While the HSA reforms represent significant tax reduction, this is not the only tax cut on the agenda.
Lawmakers are also considering full repeal of the medical device tax and delay of the health insurance tax.
The 2.3 percent medical device tax is imposed on the roughly 6,500 medical device manufacturers, the majority of which are small businesses. This tax — which totals $30 billion over a decade — directly impairs the industry’s ability to innovate, invest, and create jobs.
The health insurance tax is similarly harmful to the economy and the U.S. healthcare system. Half of the tax is paid by those earning less than $50,000 a year and it will increase premiums by $5,000 per family over the next decade according to research by the American Action Forum. As many as 1.7 million small businesses and 23 million families that receive coverage through their employer are impacted by this tax.
Repealing these taxes is also a step forward in repealing the trillion dollars of ObamaCare taxes which also include a tax on innovative medicines, a tax on employer provided insurance, and even a tax on tanning beds. Over the long term, all of these taxes should be repealed.
Regardless, these tax cuts are a strong step in the right direction. In combination with the legislation to expand HSAs, lawmakers are taking a giant step toward expanding consumer driven healthcare reform that promotes more efficient healthcare spending, strengthens retirement security and reduces taxes on the middle class.