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Health Savings Accounts

Effect of President Obama’s proposals.

April 5, 2010
by Gary Lesser, Esq. et al.

(* Adapted from The Adviser’s Guide to HSAs, Third Edition, available from cpa2biz.com.)

President Obama is committed to comprehensive health reform in order to control rising healthcare costs, guarantee choice of doctor, and assure high-quality, affordable healthcare for all Americans.

Escalating healthcare costs are crushing family, business, and government budgets. Employer-sponsored health insurance premiums have doubled in the last nine years, a rate three times faster than cumulative wage increases. The United States spent approximately $2.2 trillion on healthcare in 2007 or $7,421 per person —  nearly twice the average of other developed nations. Americans spend more on healthcare than on housing or food. If rapid health cost growth persists, the Congressional Budget Office estimates that by 2025, one out of every four dollars in our national economy will be tied up in the healthcare system. Rising healthcare costs also affect our economic competitiveness in the global economy, as American companies compete against companies in other countries that have dramatically lower healthcare costs.

The Adviser's Guide to Health Savings Accounts New Edition by Gary S. Lesser, Esq., Christine Keller, Esq., and William F. Sweetnam, Jr., Esq., provides an excellent description of all the guidance that the federal government has issued on HSAs and high-deductible health insurance plans, including what an employer should consider before offering an HSA and what an individual should consider before enrolling or establishing an HSA.

The Obama administration believes that comprehensive health reform should:

  • Reduce long-term growth of healthcare costs for businesses and government.
  • Protect families from bankruptcy or debt because of healthcare costs.
  • Guarantee choice of doctors and health plans.
  • Invest in prevention and wellness.
  • Improve patient safety and quality of care.
  • Assure affordable, quality health coverage for all Americans.
  • Maintain coverage when you change or lose your job.
  • End barriers to coverage for people with pre-existing medical conditions.

What Is an HSA?

An HSA, as described in Section 223 of the Internal Revenue Code (IRC), is a funded account, similar to an individual retirement arrangement (IRA). Contributions may be made within specified limits by individuals who meet certain eligibility requirements and/or by employers or others on behalf of such individuals. Amounts in an HSA grow on a tax-deferred basis and, if used for qualified medical expenses, may be distributed on a tax-free basis. In order to contribute to an HSA, an individual must be covered under a high-deductible health plan (HDHP) and also may not participate in a non-HDHP, subject to certain exceptions.

An HSA is the only arrangement of the three that must be funded through a custodial account or trust and accompanied by an HDHP. An HSA also is the only arrangement of the three for which amounts in the HSA account may be used for nonmedical purposes, although such an expenditure requires inclusion for income tax purposes and may result in a 10 percent additional tax.

New Standard Deduction for Health Insurance Coverage

Current Tax Treatment for Health Insurance

Under current law, if an individual receives health coverage through his employer, the entire amount of that coverage is excludable for both income and employment tax (Social Security, Medicare and federal unemployment) purposes. An outgrowth of the exclusion for employer-provided healthcare is the favorable tax treatment of expenses paid through a cafeteria plan, an FSA or an HRA. Self-employed individuals who purchase health insurance are able to deduct the full cost of health insurance for income tax (but not employment tax) purposes. Individuals who purchase their health insurance on their own rather than through their employer can only deduct their healthcare premiums for income tax purposes to the extent that they itemize their tax deductions and their healthcare costs exceed 7.5 percent of adjusted gross income; they do not receive any tax relief for employment tax purposes. Consequently, certain lower income individuals who purchase insurance on their own may not receive any income or employment tax relief on those purchases.

Obama Administration’s Proposal

The Obama administration proposed to add a new “standard deduction” for those who are covered by health insurance and to generally eliminate the other tax preferences that are available for health coverage. The administration believed that providing a standard deduction to all individuals who have health insurance — regardless of whether it is acquired through one’s employer — will result in an increase in the number of individuals covered by health insurance. The administration also believed that providing a uniform standard deduction that is not based on the amount of healthcare coverage purchased will provide an incentive for individuals to move to less comprehensive and less costly insurance, including HDHPs with lower premiums. The administration believed that this will promote more cost consciousness in healthcare decision making and make individuals more engaged consumers of health services.

New Standard Deduction for Health Insurance Coverage

Effective in 2009, the Obama administration proposed that all individuals who have qualifying health insurance coverage be provided a standard deduction of up to $15,000 for those with family coverage and $7,500 for those with individual coverage, based on the number of months that the individual is covered by the qualifying health coverage. The deduction amount would be indexed to increases in inflation based upon the rise in the consumer price index rather than being based upon healthcare cost inflation. The amount of the standard deduction would not depend on the cost of the insurance purchased, but the insurance would have to meet certain minimum coverage requirements in order to qualify, including the following:

  • A reasonable annual or lifetime benefit maximum, or both.
  • A limit on out-of-pocket exposure for covered expenses that is not higher than that currently allowable.
  • For HSAs (for example, $5,800 for single coverage and $11,600 for family coverage for 2009; $5,950.
  • For single coverage and $11,900 for family coverage for 2010).
  • Coverage for inpatient and outpatient care, emergency benefits, and physician care.
  • Guaranteed renewability by the provider.

* Adapted from The Adviser’s Guide to HSAs, Third Edition, available from cpa2biz.com.