Senate Republican leaders have unveiled a much-anticipated and broad-based health care reform legislation that includes significant expansions and enhancements to health savings accounts (HSAs).
Following the May 4 House passage of legislation to repeal the Affordable Care Act, the Senate has been working to develop its version. The legislation – the Better Care Reconciliation Act of 2017 (H.R. 1628) – is expected to be debated on the Senate floor as early as next week, where it will likely undergo further revisions as it moves through the process, but no changes to the HSA and FSA provisions are anticipated.
HSA Expansions
The House and Senate bills are essentially identical on the HSA provisions. If enacted into law, the provisions would be effective for 2018; assuming a 2018 effective date (and using 2018 indexed contribution amounts), the contribution limits would nearly double – the individual coverage contribution limit would be $6,900 for an individual and $13,800 for family coverage, as well as a provision for a $1,000 catch-up contribution for each spouse beginning at age 55.
The Senate bill provides other enhancements for HSAs, reducing the additional tax on distributions that are not used for qualified medical expenses from 20% to 10%. In addition, it broadens the current categories eligible for health care expenses from an HAS, including, for example, purchases of over-the-counter medications.
HSAs are triple tax-advantaged accounts – contributions reduce taxable income, earnings on the assets in the HSA build up tax free, and distributions for qualified expenses are not subject to taxation. These tax advantages are making HSAs increasingly popular, and a growing number of workers are setting aside money in them for health care expenses in retirement. Four out of five HSAs were opened in just the past six years, and there are now more than 20 million such accounts.
FSA Expansions
The Senate bill also contains enhancements for flexible spending accounts (FSAs), removing the limit ($2,600 for 2017) on annual contributions to an FSA. An FSA, sometimes confused with HSAs, is a tax-preferred salary reduction contribution arrangement under which out-of-pocket medical care expenses of an employee (and family members) may be paid or reimbursed. One big difference between HSAs and FSAs is that FSAs generally are under an annual use-it-or-lose-it rule (subject to certain exceptions).
