Health Savings Accounts – Major Changes Ahead

Over the last few years, the increased popularity of Health Savings Accounts has been one of the more encouraging trends in the financial services industry and one of the few bright spots in a challenging health care landscape. The concept of investing HSA dollars as a tax efficient means to accumulate funds for retirement health care costs has piqued the interest of the financial planning community (for more information watch my brief WealthWatch video on HSAs at the bottom of this letter). As a result, many planners are eager to see what changes are being proposed to HSAs with the American Health Care Reform Act (H.R. 277). There are some exciting changes being considered but also a few major improvements that are not under discussion.  To summarize the proposed legislation:

• Contribution limits would increase to match the annual deductible and out of pocket expense. This translates into $6,550 for individuals or $13,100 for families.
• For those who qualify for premium tax credits, excess credit  amounts contributed to an HSA would not count against the contribution limit.
• Introduction of a new “child health savings account” with a $3,000 contribution limit.
• Amounts withdrawn for qualified medical expenses are not subject to income tax. Qualified medical expense definition would be expanded to include over-the-counter medications and expenses incurred up to 60 days prior to date HSA was established.
• Spouses would each be allowed to make their $1,000 catch up contribution into the same account. Current rules require a separate account for each spouse in order for each to utilize their catch-up contribution.
• Individuals would be allowed to make a tax-free transfer of their RMD into their HSA.
• The penalty for making a withdrawal from an HSA prior to age 65 for non-qualified (non-health related) reasons will be reduced from 20% to 10%.

While the increase contribution limit is a major positive change, two ideas which had been considered are not in the current bill. First, HSAs would continue to only be available with a certain type of insurance (a high deductible plan that meets a few additional stipulations). There was hope that these accounts would be made more widely available. Second, a current rule stating that one can no longer contribute to their HSA once enrolled in Medicare, would still be in place. HR 277 has long way to go before it becomes law but HSAs will remain to be one of the foundational components of health care reform.

It makes sense today to connect with clients to educate them on HSA investment strategies.  An increase contribution limit will certainly add fuel to this fire.

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The information in this presentation is provided as a general overview. It is derived from the Internal Revenue Code, Medicare.gov and other government publications, all subject matter sources reasonably believed to be reliable.  Tax law and the laws governing  Medicare/Medicaid are complex and subject to change.  Clients should consult with their attorney and/or qualified tax advisor when making decisions regarding these matters.