Attack on HSAs

The U.S. Senate Committee on Finance has proposed new changes to Health Savings Accounts (HSAs) that could make them less attractive in the future. These options are only “proposed” so they are open for discussion. Here’s what you need to know about what these provisions would do to HSAs.

First, the Committee is proposing to reduce the amount you can contribute to your HSA each year by going back to the old rule which limits your annual contribution to the amount of your deductible for your HSA-qualified insurance plan. Today, you can contribute up to $5,950 to your HSA for your family ($3,000 for singles) regardless of the level of your HSA plan deductible.

Second, the Committee is debating whether to impose a limit on the amount of health care benefits available through employers that is tax-free to employees. This limit could apply to both the full cost of health insurance provided by the employer and contributions to health care accounts such as HSAs. For example, if the Committee sets a limit of $13,000 for tax-free benefits, any combination of insurance plus HSA contributions that exceeds $13,000 would be taxable. On the other hand, if one’s employer-sponsored health insurance costs $12,000, then the maximum HSA contribution would be only $1,000, even if you had a deductible above that amount. (See the previous paragraph.)

Third, the Committee is considering requiring that your employer or an independent third party certify that any withdrawal from your HSA is for a qualified medical expense. If the withdrawal is not certified, even if it was for a legitimate qualified expense, the withdrawal would be subject to income tax and a tax penalty. This would greatly increase the administrative burden of HSA plans and make them less attractive to employers and maybe employees as well.

Fourth, the Committee wants to raise the tax penalty from 10% to 20% on withdrawals from an HSA for nonmedical purposes. This is in addition to the income taxes due on any non-qualified withdrawals (if under age 65).

Finally, the Committee is thinking about changing the definition of a “qualified medical expense” to remove over-the-counter medicines (e.g., aspirin and other pain relievers, etc.) and medical products (e.g., band aids, anti-fungal creams and ointments, etc.). This means you could not use your HSA funds tax-free to pay for these types of expenses, as you can today. Unfortunately, this change would only allow you to pay with pre-tax dollars for prescription medicines and products in the future.

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