Today, July 11, the full House Ways and Means Committee will begin consideration of multiple health-related tax bills, many of which would expand tax breaks for Health Savings Accounts (HSAs). These HSA bills would primarily benefit those with high incomes, rather than make health coverage more affordable for low- and moderate-income children and families.
Health Savings Accounts are tax-favored savings accounts attached to high-deductible health plans. Under current law, in 2018, if an individual is enrolled in a health plan with a deductible of at least $1,350 for individuals and $2,700 for families, they may establish an HSA to pay for their out-of-pocket medical expenses. HSAs have long provided unprecedented tax-sheltering opportunities for those with high-incomes, unlike those of any other savings account. Taxpayers with an HSA can make tax-deductible contributions of $3,450 for individuals and $6,900 for families, have earnings on those contributions (which can be invested in stocks and bonds) grow tax-free, and withdraw those funds tax-free if used to pay for medical or long-term care expenses. In comparison, IRA and 401(k) contributions and earnings are tax-free but withdrawals are taxed and Roth account withdrawals are tax-free but contributions are not. In addition, HSAs have no income limits, which allow high-income people who have already made the maximum 401(k) contributions or are ineligible to make tax-deductible IRA contributions because their incomes are too high to set aside more of their funds on a tax-free basis.
As one would expect, the tax benefits of HSAs primarily accrue to high income individuals, even though they are most able to afford their out-of-pocket medical expenses. That’s not only because they have more income to contribute to HSAs but also because the tax benefits of HSAs rise with one’s tax bracket. For example, lower-income individuals with income tax liability would receive a tax break of 10-12 cents for every $1 contributed to a HSA. In contrast, high-income individuals would receive a tax break of 32-37 cents for every $1 contributed.
Based on Treasury data, in tax year 2014, families with incomes over $100,000 contributed 57 percent of all HSA contributions. Their annual contributions, on average, were twice as large as those from families with incomes below $100,000 (and for those with incomes above $500,000, their average contributions were three times as large), with other research showing that high-income taxpayers are most likely to make the maximum contributions. In addition, their annual balances, on average, were more than 2.6 times larger than those with incomes below $100,000 (and for those with incomes above $500,000, their balances were 5.7 times larger, on average). This is an indication that as expected, high income taxpayers are primarily using HSAs as long-term savings vehicles rather than to pay for immediate out-of-pocket health expenses.
Yet, among the various HSA bills the Ways and Means Committee is considering is a bill (H.R. 6306) that starting next year, would nearly double the maximum annual HSA contribution amounts — to $6,750 for individuals and $13,500 for families in 2019 — at a cost of $14.5 billion over the next ten years, according to the Joint Committee on Taxation. The benefits of increased contribution limits would overwhelmingly go to the highest income taxpayers, who are the ones who can and already do make the maximum contributions under current law and who are in the highest tax brackets. As a result, it would likely do little or nothing to make out-of-pocket costs more affordable for low- and moderate-income families. It would also make high-deductible plans more attractive overall, even though research (here and here) shows that such plans discourage use of needed care, including high-value services like cancer screenings, prescription drugs and diabetes care, especially among low-income individuals. For example, more employers may be encouraged to shift to high-deductible HSA-eligible plans if their highly compensated executives and managers could contribute much more on a tax-free basis to such accounts annually.
Put another way, the total cost of the HSA (and Flexible Spending Account) bills that the Ways and Means Committee is considering is roughly about $40 billion over ten years. (There are also other bills being marked up including bills further delaying the Affordable Care Act’s employer mandate, further delaying the “Cadillac” tax on high-cost employer plans, permitting tax credits to be used for catastrophic plans, and to allow higher deductible “copper” plans in the individual market, which cost tens of billions more.) That is well in excess of the cost of permanently lifting Puerto Rico’s federal Medicaid funding cap and setting Puerto Rico’s Medicaid matching rate in the same manner as for the states, which would ensure that low-income Puerto Ricans have access to needed care over the long-run. About 62 percent of Puerto Rican children, and 48 percent of all residents of the Commonwealth, rely on Medicaid today.