As we witness the uncertain fate of the Affordable Care Act, one key concern is how health savings accounts (HSA) will fare when the dust finally settles. The reality is that HSAs will likely be just fine.
Remember that the HSA was created prior to the ACA, and realized immediate growth as the economy drove more employers to establish high deductible health plans for their employees. The use of HDHPs isn’t expected to slow anytime soon, and HSAs will continue to grow as well.
The larger question becomes what kind of health plans will be offered and by whom.
The ACA governs the HSA in three specific ways, all of which would revert back if the ACA were repealed. Reversal of these provisions, however, likely would not jeopardize HSA growth.
- A change in the penalty tax—The ACA increased the nonqualified distribution penalty tax from 10 percent to 20 percent. Both the House plan and the Senate plan that sought to replace the ACA set this penalty back to 10 percent. Clearly, if the ACA is repealed, the penalty tax will be reduced to 10 percent anyway. This change would only encourage future use of the HSA.
- Redefining qualified medical expenses—The ACA provides that over-the-counter medications (other than insulin) are considered nonqualified expenses without a doctor’s prescription. Again, a number of past proposals reversed this aspect of the ACA. Repeal of the ACA would allow nonprescription over-the-counter medications as qualified medical expenses, opening up the HSA to broader use.
- Eliminating dependent coverage—The ACA requires health plans that provide dependent coverage to make coverage available to children under age 26. While a repeal of the ACA would eliminate this provision and the potential for nondependent children to open an HSA under their parents’ plan, these children would remain HSA-eligible if they elected to purchase a plan directly. Historically, statistics have shown that the children covered under their parents’ plan are not key drivers in HSA growth. They do, however, become active purchasers of HSAs when they purchase their own HDHP.
At this time, there are essentially three potential outcomes for HSAs for the remainder of 2017.
First is that no legislation is passed and the ACA remains in full effect. Thus, the three previously listed provisions remain in effect and HSA growth continues as it has for the past 10 years.
Second, the ACA is repealed and the three provisions revert back to pre-ACA rules. Aside from the nondependent coverage item, the other revisions would only make HSAs more attractive and HSA growth would continue.
Lastly, Congress enacts a hybrid of the Senate and House bills. Under a law based on these bills, HSAs are likely to increase in popularity. Both bills propose to raise contribution limits and to expand, in different ways, qualified distributions. For example, the Senate bill allows for a 60-day grace period to establish an HSA following the effective date of coverage under an HDHP.
This grace period allows expenses occurring during the grace period to be treated as qualified distributions from the HSA. That is just one example.
In today’s world of 24/7 news, the message about healthcare gets condensed and sometimes lost as to what it will mean to consumers—your clients—as they look ahead to open enrollment for benefits with their employers or look to buy health insurance in the open market. Thus, it is more important than ever to continue to present them with products and services that will help them plan for tomorrow.
Whatever direction health care reform goes, it is clear that the HSA will be a key component of consumers’ financial decisions in health care. After all, HSAs and HDHPs were market-driven prior to the enactment of the ACA and continued to be with its passage. The economy will continue to drive this trend as employers seek to attract and retain employees in this tight job market.
Steve Christenson is executive vice president at Ascensus, a technology-enabled solutions provider that helps more than 7 million Americans save for the future. Christenson oversees retirement and health savings products and services. These products and services include documents, education services, reference materials, consulting services, and account support software. He is also responsible for developing third-party relationships with technology suppliers and financial associations. Christenson is also an industry speaker and author of several articles on health savings accounts.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
