Should HSA Contribution Limits Rise to the Statutory MOOP?

A bill before Congress proposes raising Health Savings Account contribution limits to the statutory out-of-pocket maximum. Is this good policy? If so, under what circumstances?

Members of Congress haven't forgotten about Health Savings Accounts, even if they've done little during the past three years other than to extend the time frame that insurers and employers can cover virtual care (telemedicine) below the deductible on an HSA-qualified plan. Each session of Congress sees the introduction of a grab-bag bill (which offers a dozen or more proposals that expand ore ease the transition to Health Savings Account eligibility or widen the range of expenses that are qualified for tax-free reimbursement.

These bills generate some interest among employers, benefits advisors, and industry insiders. But none has crossed the finish line in recent years. That record includes proposals to increase the contribution limit to match the contribution limit to the statutory out-of-pocket maximum (a combination of deductibles, coinsurance, and copays for covered services) of an HSA-qualified plan.

Will it happen this year? Should it? Let's look at the pros and cons, then examine some proposals that put Health Savings Accounts in the middle of approaches to change the way that we as a society deliver and fund medical care.

?The Case for and against Higher Contribution Limits

The case for increasing the limits is that a growing number of Americans are experiencing medical debt and collections. Many patients respond by taking non-qualified distributions from a retirement account (paying taxes and penalties as they further deplete their long-term savings) or declaring bankruptcy. If they could save more in their Health Savings Accounts during good years, they could build medical equity to spend on future care.

Another argument in favor of higher contribution ceilings: The current limits ($4,150 for self-only coverage and $8,300 for a family plan in 2024, plus an annual $1,000 catch-up contribution for owners who are age 55 or older) fall far below the annual financial responsibility that most account owners' medical plans impose. Owners with sick family members may not be able to contribute enough to reimburse all that year's out-of-pocket expenses with pre-tax dollars.

The case against increasing the limit centers on the reality that only about 4% of accounts are funded to the statutory contribution limit. Thus, increasing the limits would seem to favor only high-income owners, which in turn may erode political support for an account that helps millions of hard-working families manage their increasing out-of-pocket financial responsibility for their medical, dental, and vision services

Another negative is scoring. All proposed legislation is examined, or scored, to determine the effect - increase in spending or decrease in revenue - on the federal treasury. Health Savings Account scorers assume that all owners will contribute to the statutory maximum each year, even though fewer than one in 20 do so today. This assumption creates an unrealistically high score that dooms this type of provision.

Reimagining Health Savings Accounts

Many Republicans in Congress who want to see fundamental changes in medical coverage have built their reform efforts around Health Savings Accounts. These efforts are a two-edged sword. On the one hand, if one of these initiatives becomes law, it may dramatically increase the amount of income that hard-working Americans can accumulate tax-free to pay for current or future qualified expenses. On the other hand, many Democrats reflexively resist any Health Savings Account reform or expansion because they sense a GOP effort to undermine the Patient Protection and Affordable Care Act of 2010 (often called the Affordable Care Act, the ACA, or ObamaCare), which was Democrat president Obama's signature legislation.

Here are some of the proposals that reimagine Health Savings Accounts:

Replace the Employer Exclusion

Since the 1940s, the federal tax code has permitted employees to receive a portion of their income in the form of tax-free employer contributions to medical (and some other) workplace-sponsored premiums. This program provides a stable coverage market for about 170 million Americans. But critics note that employer-sponsored coverage limits choice (the company chooses the handful of plans that it offers) and drives the cost of medical care, and thus future premiums, higher due to the plans that companies choose and the way that they subsidize premiums.

As an alternative, imagine that companies didn't choose plans, but rather deposited the amount of their premium subsidy into a Health Savings Account owned by the employee. Each worker could then choose the appropriate medical coverage and spend the balance to reimburse qualified expenses tax-free. This program essentially mimics today's Individual-Coverage Health Reimbursement Arrangement, but with more flexibility and participating employees' permanent ownership of account assets.

Under current law, Health Savings Account balances can't be used to reimburse these premiums tax-free. And the current limits - $4,150 for self-only coverage and $8,300 for a family plan - are inadequate when employers often subsidize family premiums by $15,000 or more annually.

This provision would generate a neutral budget score because it would shift the same funds from one pre-tax program to another.

Replace Advance-Premium Tax Credits

Today, individuals who don't have access to affordable coverage through their employer can purchase a nongroup plan through a federal- or state-facilitated marketplace. If these buyers meet income qualifications, they can receive a premium subsidy paid by the federal treasury to the insurer in whose plan the buyer enrolls.

If the savings were deposited instead into a Health Savings Account, a nongroup buyer would be able to more effectively balance premium and out-of-pocket financial responsibility. With a $1,500 premium subsidy, a typical buyer today spends her full subsidy and chooses a plan that minimizes her net monthly premium. That plan may or may not be her best option. But she must spend the full subsidy on premium or lose the full value.

In contrast, if the amount of her premium subsidy were deposited into a Health Savings Account, she wouldn't lose any of the subsidy value if she chose a plan with a much higher deductible. This move would help employees right-size their coverage.

Replace Cost-sharing Subsidies

Nongroup buyers with particularly low incomes also qualify for cost-sharing subsidies. This program is designed to subsidize low-income nongroup buyers' out-of-pocket expenses. For example, a low-income consumer who chooses a family plan with a $3,500 deductible may qualify for a $2,700 deductible subsidy, reducing her maximum net responsibility to $800. These subsidies are delivered directly from the federal treasury to her insurer.

In contrast, what if that same subsidy were deposited into an account that she owns? With both the premium and cost-sharing subsidies at her disposal, she would be a true consumer, searching for the best combination of price and depth of coverage. She would be empowered to make better choices if she, not the federal government, controlled the money.

This approach would be budget neutral because it would redirect today's cost-sharing subsidies from insurers to buyer's Health Savings Accounts.

Incorporate Health Savings Accounts into Medicare

Other proposals would introduce Health Savings Accounts to the nearly 70 million Americans enrolled in Medicare. Under current law, anyone enrolled in any Part of Medicare is disqualified from opening or further funding a Health Savings Account. Not offering financial incentives to Medicare enrollees to choose their optimal coverage and bring their consumer skills to purchasing care seems like a suboptimal design. That's particularly true as the ranks of Medicare recipients swell by millions of Health Savings account owners who age into the Medicare program.

How to incorporate Health Savings Accounts into Medicare? Here are several proposals:

Permit any Medicare enrollee to fund a Health Savings Account. This proposal, introduced during the last session of Congress by Rep. Ami Bera (D-CA), a physician, and Rep. Jason Smith (R-MO), now the chair of the House Ways and Means Committee, would permit any Medicare enrollee to open and fund a Health Savings Account up to the statutory limit ($4,150 in 2024, plus the $1,000 catch-up contribution). An enrollee with, say, $4,000 of out-of-pocket expenses could save nearly $500 in taxes (assuming a 12% federal tax rate and no state income taxes) by running those qualified expenses through a Health Savings Account. Increase the tax rate or the contribution amount and the tax savings grow.

The original legislation paid for the loss of tax revenue by not allowing seniors to reimburse Medicare premiums tax-free and not waiving the 20% penalty for withdrawals for qualified expenses beginning at age 65. This pay for makes Health Savings Accounts slightly less attractive on paper. In practice, few owners accumulate enough in their accounts to reimburse their remaining lifetime Medicare premiums and qualified out-of-pocket medical, dental, vision, and hearing expenses, so not permitting reimbursement of Medicare premiums retains balances to be used for qualified out-of-pocket expenses. And the 20% penalty doesn't apply if owners use their accounts for their intended purpose.

The fiscal score attached to this proposal may be a concern. But every dollar of lost tax revenue to the federal treasury represents a dollar that remains in the hands of seniors - a major constituency that both major political parties want to help. Seniors who contribute $5,150 would save about $750 in taxes. that's the equivalent of roughly a 3% increase in the average Social Security benefit of $20,000 annually without tapping the Social Security trust fund to pay the additional benefit.

Add a Health Savings Account Option in Medicare Advantage. More than half of all Medicare enrollees now choose Medicare Advantage over traditional Medicare. Medicare Advantage (also called MA or Medicare Part C) plans are sold by private insurers under the supervision of Medicare administrators. These plans look like traditional managed-care coverage (often with a network of contract providers, a designated primary-care physician, and referrals to specialty care). Given traditional Medicare's cost-sharing (a $1,632 inpatient deductible for each unique hospital stay, plus a $240 deductible and unlimited 20% insurance for outpatient care), a Medicare Advantage plan that meets the requirements of an HSA-qualified plan wouldn't impose more patient financial responsibility than Part A (inpatient care) and Part B (outpatient services) do today.

This product could be crafted to be budget neutral by adjusting the out-of-pocket financial responsibility on the Medicare Advantage plan.

The Bottom Line

Will it happen? Will Congress increase Health Savings Account contribution limits to the statutory out-of-pocket maximum - or higher? Probably not. But Health Savings Accounts could play a role in a market-oriented reform proposal that addresses some of the inherent flaws in the current design and funding of medical coverage.

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HSA Wednesday Wisdom is published every other week, alternating with HSA Question of the Week. The content of this column is informational only. It is not intended, nor should the reader construe the content, as legal advice. Please consult your personal legal, tax, or financial counsel for information about how this information applies to you or your entity.