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Ways & Means Moves on HSAs

With concerns about healthcare costs looming large for American workers, a key congressional committee just took a major step to boost health savings accounts.

The powerful House Ways and Means Committee over two days (July 11-12) separately approved a package of 11 bills aimed at expanding consumer-directed health care and lowering premiums, with a key theme of expanding the use of HSAs.

“Health Savings Accounts are an important tool for families to set aside money that’s tax-free to pay for needed health care expenses. This helps reduce the burden of high health care costs and enables families to plan ahead for events like the birth of a child,” noted Ways and Means Committee Chairman Kevin Brady (R-TX) in his opening statement. “It’s no wonder why so many families think HSAs are so great. They give choice and lower costs.”

One of the bills approved (H.R. 6306), sponsored by Rep. Erik Paulsen (R-MN), would increase the maximum HSA contribution limits so that the limits would be matched to the combined amount of the annual deductible and out-of-pocket limitation of high deductible health plans (HDHP).

The current limits on annual contributions that can be made to an HSA for 2018 is $3,450 for self-only coverage and $6,900 family coverage, but, under the legislation, those limits would nearly double, rising to $6,650 for self-only coverage and $13,300 for family coverage. These dollar threshold limits are subject to annual inflation adjustments.

(Note: earlier this year there was a $50 downward adjustment to the HSA family contribution limit resulting from changes made to the inflation adjustment calculations by the Tax Cuts and Jobs Act, but the IRS later waived that adjustment.)

The legislation would also allow both spouses to make catch-up contributions to the same HSA. Under current law, married spouses who are at least 55 years old can only make a $1,000 catch-contribution to his or her own HSA, but the legislation removes that allocation rule. Thus, spouses would be permitted to contribute their basic and catch-up contribution amounts to one spouse’s HSA.

H.R. 6306 would also create a grace period for medical expenses incurred before the establishment of an HSA. Under the provision, if a taxpayer establishes an HSA within 60 days of obtaining coverage under a HDHP, any distribution from the HSA to pay for a qualified medical expense incurred during that 60-day period would still qualify for the tax-favored treatment, even though the expense was incurred before the date the HSA was established.

If enacted, this legislation would be effective for tax years beginning after 2018.

Other Expansions

Other provisions approved by the committee that expand the tax-favored use of health accounts include:

  • Permitting the purchase of certain over-the-counter medical products as qualified medical expenses for tax-favored health accounts;

  • Clarifying that certain employment related services (such as on-site clinics) are not treated as disqualifying coverage for purposes of HSAs;

  • Allowing an eligible individual to make HSA contributions if a spouse has a Flexible Spending Account, provided that FSA does not also reimburse for expenses of the spouse with the HSA;

  • Allowing individuals entitled to Medicare Part A by reason of being over age 65 to contribute to an HSA;

  • Allowing FSA and Health Reimbursement Account (HRA) terminations or conversions to fund HSAs; and

  • Allowing the carryforward of health flexible spending arrangement account balances.

What’s Next?

The HSA expansion legislation will next move to the House of Representatives for consideration, where it may well pass, but then faces an uncertain future in the Senate — even though similar legislation has previously been introduced by Senate Finance Committee Chairman Orrin Hatch (R-UT). While some of these proposals could pick up bipartisan support, it is an election year – and thus the prospects for legislation that would widen the deficit (such as the 10-year, $15 billion cost of H.R. 6306) or be seen as undermining the Affordable Care Act seem dim.