House Committee Approves HSA Reform Legislation

The House Ways and Means Committee approved in September the Health Opportunity Patient Empowerment Act of 2006 (H.R. 6134), a measure that would raise the limit on employee and employer contributions to tax-advantaged health savings accounts (HSAs), allow tax-free rollovers from other tax-advantaged savings accounts to HSAs, and provide incentives for employees to enroll in HSAs. Ways and Means Chairman Bill Thomas (R-CA) has said the bill could pass before the 109th Congress adjourns in January.

Under current law, holders of qualified high-deductible health plans (HDHPs) are permitted to make tax-deductible contributions to an HSA equal to the lesser of the amount of the HDHP deductible or an indexed amount, $2,700 for individuals and $5,450 for families for tax year 2006. The proposed legislation would set the contribution limits at the indexed amounts, regardless of the size of the plan's deductible. The current pro-rated contributions limits that apply to HSAs created in the middle of a tax year would be repealed, allowing taxpayers who start accounts after the start of a year to make the full annual contribution.

In addition, the measure would permit employees to make a one-time tax-free transfer of funds held in a flexible spending account (FSA) or health reimbursement arrangement (HRA) to an HSA. Taxpayers would also be allowed to make a one-time distribution from an individual retirement account (IRA) to an HSA.

The proposed legislation would repeal the current requirement that employers make comparable contributions to the HSAs of all employees. Under the terms of the bill, employers would be allowed to make larger contributions to the HSAs of lower-paid employees than to the accounts of highly compensated employees.

Commenting on the bill, Committee Chairman Thomas said, "HSAs are still relatively new, but we are already seeing them quickly grow in popularity in the early stages of their existence. The adjustments in this bill will make HSAs more attractive as Americans consider their health insurance options."

The measure remains controversial, however. The Joint Committee on Taxation has estimated the legislation would reduce federal revenues by $287 million between 2008 and 2011, and by $1.04 billion between 2008 and 2016.

Opponents of the measure have argued that HSAs are often used to shelter savings from taxes, rather than to pay for medical expenses. A study by the Government Accountability Office (GAO) of HSA-eligible plan enrollees showed that, in 2004, 51% of tax filers reporting HSA contributions had adjusted gross incomes of $75,000 or more, and that HSA contribution levels among high-income enrollees was considerably higher than among lower-income participants. Moreover, the GAO found, 55% of taxpayers reporting HSA contributions in 2004 withdrew no money from their accounts in the course of the year. GAO researchers said many participants in focus groups of HSA-eligible plan enrollees reported using their HSAs as tax-advantaged savings vehicles, accumulating HSA funds for future use.

Opponents of the bill also point to a study by the Kaiser Commission on Medicaid and the Uninsured asserting that, while the premiums for HSA-qualified HDHPs may be lower than those of traditional plans, HDHPs also shift more financial risk to individuals and families. The Kaiser Commission's analysis showed that HSA-eligible plans are unsuitable for low-income families because they would have difficulties covering high out-of pocket costs and do not face a large enough tax liability to benefit from the tax deductions associated with HSAs. The Kaiser study concluded that HSA-eligible plans may exacerbate, rather than alleviate, the problems low-income families currently face in affording and accessing health care.

At the markup of H.R. 6134, Rep. Pete Stark (D-CA), ranking Democrat on the Ways and Means Health Subcommittee, asked, "Why are we dedicating the few remaining hours of this Congress on a bill that does little more than provide a new billion-dollar tax shelter for the wealthy?"

Stark added, "Health care is certainly an issue we should be addressing in Congress. But make no mistake, HSAs are not health policy, they are tax policy. Attempts to make HSAs even more attractive—like the one we have before us today—threaten traditional insurance coverage and shift more of the cost burden for health care to workers. We should not be wasting precious time on an expensive niche policy that benefits a few, at the expense of everyone else.

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