Health Savings Accounts: Coverage That Works for All Americans

Health Savings Accounts (HSAs) have long been touted as a valuable tool in the arsenal of health coverage. Remember, it isn’t what you pay that counts, it is what you pay, after taxes.  Originating in 2003, HSAs provide a triple tax benefit: contributions are tax-deductible, earnings grow tax-free and withdrawals for qualified medical expenses are also tax-free. Where funded through a cafeteria plan, taxes avoided include both employer- and employee-paid FICA and FICA-Med, plus federal and state income taxes.

This combination makes HSAs an attractive option for both employees and employers looking to manage healthcare costs efficiently.

The Current State of HSAs

Despite this advantage, HSAs remain underutilized and misunderstood. According to a 2023 survey, only 53% of employers offer health coverage, and of those, just 24% offer HSA-capable coverage. This means that a mere 13% of firms with employees offer HSA-capable options.

Even among those eligible, HSA contributions have remained stagnant, with only about half of eligibles contributing to their accounts. This underutilization illustrates a broader issue of access and awareness.

Proposals for Expanding HSA Accessibility

Several legislative proposals have been put forward to make HSAs more accessible and useful for a broader range of Americans. These proposals include:

  • Broadening HSA Eligibility: Changing the tax code definition of coverage eligible for HSA contributions from “High Deductible Health Plan” (HDHP) to “HSA-Capable Health Plan.” This would allow any health plan that meets a “Bronze level” of coverage (typically covering up to 65% of eligible medical expenses) to be HSA-capable.
  • Auto-Enrollment Features: Borrowing features from 401(k) plans to automatically enroll employees in HSAs, thereby increasing participation rates.
  • Flexible Investment Options: Allowing for a default investment for HSA assets other than capital preservation without imposing ERISA fiduciary duties.
  • Medicare Integration: Ensuring that Medicare Advantage plans can offer HSA-capable coverage and allowing older workers who have started receiving Social Security benefits to opt-out of non-contributory Medicare Part A. Opt out for Medicare Part A is already permitted when contributions are required.

These proposals aim to make HSAs more inclusive and practical for a wider demographic, including low-wage workers, individuals with varying health conditions and both young and old Americans (Paragon Institute).

Addressing Policy Resistance

Despite these proposed changes, there is significant resistance. Too many Americans fail to enroll – discouraged by the required deductible. And, even though HSA enrollment has grown over the past 20 years from zero to almost 40 million, too many policymakers mistakenly believe  that HSAs, in their current form, do not adequately serve the needs of low- and middle-income individuals and those with chronic health conditions. Critics argue that HSAs primarily benefit higher-income individuals who can afford to contribute significant amounts to their accounts.

However, the specific proposals noted above are primarily focused on expanding eligibility to low- and middle-income households to enable them to obtain tax-favored financing of out of pocket medical, dental, vision, hearing and long-term care expenses – now or in the future.

To navigate this resistance, it is crucial to present HSAs as a flexible tool that can be tailored to meet the diverse needs of all Americans. By emphasizing the potential for HSAs to reduce the financial impact of healthcare costs, proponents can build a more compelling case for their expansion.

The Vision for the Future of HSAs

Looking forward, the goal should be to create an environment where all Americans benefit from access to HSAs, regardless of their income, health status or employment situation. This includes:

  • Educational Initiatives: Increasing awareness and understanding of HSAs through comprehensive educational campaigns targeting both employers and employees.
  • Policy Adjustments: Implementing the policy changes suggested earlier to broaden eligibility.
  • Prompting Participation: Applying learnings from deploying automatic features in 401k plans to increase utilization, and in turn, the value received.
  • Removing Financial Barriers to Obtaining Care: Increasing participation in and contributions to HSAs will reduce the large number of Americans who forego care because they are not financially prepared for out-of-pocket expenses.

By making these changes, HSAs can become a powerful tool for improving the financial and physical health of all Americans. The potential for HSAs to support long-term financial security, reduce the after tax cost of healthcare and prepare for necessary health care makes them an essential component of a comprehensive healthcare strategy.

HSAs are already transforming the way tens of millions of Americans save for and manage their healthcare expenses. However, extending this potential to all Americans requires thoughtful policy changes, increased awareness and a commitment to ensuring all have effective access to HSAs.

By broadening eligibility, integrating flexible investment options and promoting participation through educational initiatives, HSAs can truly become a coverage option that works for all Americans.

For more information on how HSAs can benefit your organization and employees, contact aequum for insights and support in maximizing your healthcare plan’s success.