The debate over our nation’s health care policy has consumed the first few months of the 115th Congress and shows no signs of abating. While it may have faded from the headlines for the moment, House Republicans continue to debate different options for repealing and replacing the Affordable Care Act (ACA). One of the key pillars of the GOP’s legislative attempts is the American Health Care Act (AHCA) – legislation that significantly expands and enhances health savings accounts (HSAs).
HSAs are “super” tax-advantaged accounts that eligible individuals can use for current and future health care expenses. “Super” in that contributions to an HSA are pre-tax (like a 401(k)) and earnings on those contributions are not subject to taxation (also like a 401(k)). Unlike a 401(k), however, owners of HSA accounts don’t pay taxes on the withdrawal of those contributions and earnings, as long as they go entirely toward paying qualified medical expenses.
More than 18 million Americans already use HSAs, and health plans that allow for them are the fastest growing type of plan in the health insurance market. HSAs experienced 21% asset growth in 2016, and the average employer contribution is about $686 per year, according to Devenir Market Research.
The AHCA would nearly double the contribution limits for HSAs to $13,100 for a household with family health insurance coverage (with a $2,000 catch-up contribution for households age 55 or older). The bill would also broaden the range of items that HSA withdrawals can be used for, including purchases of over-the-counter medications, health insurance premiums, prescription drugs, co-pays, deductibles and other out-of-pocket health care expenses. These provisions expanding HSAs will be in the final deal if the AHCA is enacted.
We believe HSAs will expand more rapidly in the market under the GOP plan, especially among smaller businesses. HSA sellers and administrators will develop participant education and advice tools that integrate health and retirement savings more tax efficiently, especially for middle income savers. Top advisors are already looking at ways to incorporate HSAs in their offerings, frequently as part of an overall emphasis on financial wellness.
The answer to the question, “Where should I save — HSA or 401(k)?” is a “no brainer,” especially with these expanded HSAs. First, participants will be advised to first save enough in their HSA to cover their out-of-pocket expenses and deductibles in their health plan — as much as $15,100 for a couple age 55 and older. Second, participants will be directed to save up to the match in their 401(k). And then, if there is anything left, to contribute more to their HSA. This approach maximizes the tax efficiency for participants across both programs.
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Obviously we see this as a risk to our members who specialize in retirement plans. It’s also a potential risk to retirement security, in that not every retirement expense is health-related — and the penalties for withdrawals from an HSA for expenses not related to health care are significant.
The American Retirement Association has developed a simple, common-sense legislative solution that not only resolves this potential savings conflict and complexity for employers, but also creates a new market for retirement plan advisors. Under the proposal, employers would be allowed (though not required) to add HSAs as a “sidecar” account to a 401(k) plan. Plan advisors would then be able to offer HSAs along with 401(k) plans and provide holistic education, advice and planning to employees who have both accounts. HSA holders would have access to the same kinds of retirement plan investments in their HSA that they do in their 401(k) — and the same professional advice. We are working aggressively to include the proposal in the AHCA or tax reform legislation, whichever moves first or presents the best opportunity.
We have reached out to a number of our NAPA members for help voicing support for the idea with members of Congress. If you are interested in helping us, please email Alisa Wolking, who is spearheading our grassroots outreach.
Brian H. Graff, Esq., APM, is the Executive Director of NAPA and the CEO of the American Retirement Association. This column was published in the Summer 2017 issue of NAPA Net the Magazine.
