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Solution Framework of Market Forces

HSA Accounts, an assessment from Heritage

The Progress of the HSA

Health Savings Accounts were enacted as part of the Medicare Modernization Act of 2003 and allow individuals who have a HSA-qualified high-deductible health plan to set aside funds in a tax-preferred account to pay for qualified health care expenses, including the deductible. The value of this arrangement is that it gives individuals a new low-premium health insurance and pre-tax savings option—an affordable alternative to traditional high-premium, first-dollar coverage.

HSAs build on the original Medical Savings Accounts (MSAs) concept but remove many of the regulatory obstacles Congress imposed on MSAs. Among those changes, Congress removed the cap on the number of MSA-style policies that could be sold, eliminated the sunset provisions on the accounts, and allowed both employers and employees to make contributions.

The Right Way: Administrative Improvements

H.R. 5262 includes a variety of positive and useful provisions that take into account the past three years of experience with HSAs and would improve the administration of HSA arrangements:

·         Allow individuals who purchase a HSA-qualified high-deductible health plan to pay their premiums from the HSA;

·         Increase the maximum contribution limit to an HSA to match total out-of-pocket expenses, not just the deductible;

·         Permit employers to vary contributions for chronically ill workers; and

·         Establish greater compatibility between HSAs and other health account arrangements, such as flexible spending accounts (FSAs) and health reimbursement accounts (HRAs).[5]

The Wrong Way: Titling the Marketplace The problematic provisions of H.R. 5262 would establish new tax preferences in favor of high-deductible health plans. The Bush Administration proposal and the Cantor bill both rightly aim to create greater tax equity between those who obtain coverage of their own, without any tax preferences, and those who obtain coverage through the tax-preferred employer-based system. Both proposals would provide tax relief to those who purchase coverage on their own but only to those who purchase a HSA-qualified high-deductible health plan. They would accomplish this by making two changes to the tax code:

·         Extend an above-the-line tax deduction for the premium of an HSA-qualified high-deductible health plan, and

·         Offer a refundable health care tax credit for the purchase of a HSA-qualified high-deductible health plan.

While efforts to provide tax relief to those who purchase coverage on their own, outside the place of work, is a worthy goal, limiting such tax relief to HSA-qualified high-deductible health plans perpetuates the manipulation of the tax code in favor of certain health insurance arrangements, limits individual choice, and is incompatible with tax simplification.

Moreover, H.R. 5262 increases the tax penalty on non-qualified withdraws from an HSA from the customary 15 percent, which applies to most tax preferred accounts (such as IRAs), to 30 percent. It also applies a 15 percent tax penalty on non-medical withdraws by the disabled, Medicare enrollees, and heirs—populations that were specifically excluded from such penalties in the original law.


According to the U.S. Government Accountability Office, since first authorized by the federal government January 1, 2004, the number of HSA accounts has increased substantially to over 3 million accounts nationwide.

Industry experts expect that by 2010 this number will be between 10-15 million people with accumulated assets ranging from $10 to $62 billion.