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W&M approves HSA enhancements

Health care costs stethoscope over dollars

Congress has received a lot attention of late for action on the full House floor.

Over the weekend, U.S. Representatives narrowly averted a federal government shutdown, agreeing to a measure to fund all of Uncle Sam's offices through Nov. 17. Today, Republican House members ousted their leader, Speaker Kevin McCarthy, for the first time ever.

But while those large-scale, and related, moves were brewing and ultimately unfolding, some members were actually doing their policy making jobs.

Members of the tax-writing House Ways and Means Committee were among those working under the radar. They passed, with votes from lawmakers representing both parties, two health savings account (HSA) bills.

The Bipartisan HSA Improvement Act of 2023(H.R. 5688) and the HSA Modernization Act of 2023 (H.R. 5687) expand the eligibility of those wanting to establish and contribute to an HSA, as well as reduce bureaucratic barriers and red tape that complicated full access to these tax-advantaged accounts, according to the measures' sponsors and W&M leadership.

The medical and tax appeal of an HSA: If you have a high-deductible healthcare plan, or HDHP, you shell out less money in policy premiums, but those savings often are reduced when you have to pay, as the name says, high deductibles for medical treatment.

To reduce that healthcare cost, people who opt for a HDHP can open an HSA. Money put into this account is used to pay those deductible expenses.

There also are several tax advantages to an HSA.

If your HDHP and HSA are through work, your HSA contributions are made pre-tax. If your employer also contributes to your HSA on your behalf, that amount isn't taxable, either.

If you contribute to an HSA on your own, those contributions are deductible when you file your annual tax return. Even better, this is an above-the-line deduction, meaning you don't have to itemize to claim it.

Distributions from your HSA are also tax-free, as long as you use them to pay for qualified medical expenses. Plus, earnings on HSA money compound annually on a tax-free basis.

And unlike a flexible spending account (FSA), there's no use-or-lose rule for HSAs. Any unused HSA money can be carried over into future years. If you still have funds in the HSA when you turn 65, you can withdraw the money without penalty and use it on non-medical expenses, but you will have to pay income tax on those withdrawals.

The amount you can put into an HSA is adjusted each year for inflation.

The Internal Revenue Service announced in May that individuals with HDHP coverage can in 2024 put up to $4,150 into an HSA. Those with an HDHP for their whole family can stash up to $8,300 into the associated HSA next year. Policy holders who are 55 or older by Dec. 31 can sock away an additional $1,000 for the tax year.

Enhancing HSAs: The two new bills would make HSAs even more appealing.

Changes under the Bipartisan HSA Improvement Act would —

  • Allow individuals who utilize key health services such as direct primary care arrangements and worksite health clinics to use their own resources to contribute to HSA funds.
  • Eliminate the prohibition against an individual establishing an HSA if their spouse has an existing flexible spending account (FSA) for health care expenses.
  • Let individuals convert their own FSA or similar health reimbursement arrangement (HRA) dollars into an HSA.

The HSA Modernization Act (H.R. 5687) would —

  • Expand eligibility for individuals to participate in HSAs who are veterans receiving care through the Veterans Administration; seniors on Medicare who are working; Native Americans; and those enrolled in certain health benefit exchange plans.
  • Increase the contribution limits for HSAs to better align with what an individual might owe in total out-of-pocket expenses and deductibles.
  • Allow the use of HSA funds for health care services that occurred up to 60 days prior to the establishment of the account.
  • Let spouses contribute catch-up funds into the same HSA, rather than making them establish separate accounts for such contributions.
  • Increase access to mental health and home health care services for those still contributing to an HSA.

The modernization changes would take effect in 2026. The Joint Committee on Taxation estimated that H.R. 5687 would cost a total of $58 billion over 10 years. The HSA improvement act would cost another $13 billion.

Low- and middle-income tax help: Those dollar amounts could derail the otherwise bipartisan-supported HSA bills.

Means Chairman Jason Smith (R-Missouri), however, sought to highlight the benefits, rather than the costs, in discussing the HSA measures after they cleared his panel.

"With 78 percent of health savings accounts owned by taxpayers making less than $100,000, HSAs are clearly a tool middle- and low-income families find useful," Smith said. The measures' common-sense changes, the chairman added Smith, also will help more people enjoy the benefit of HSAs.

Will the political appeal of help with medical costs offset deficit hawks' cost concerns? Possibly, since 2024 is an election year.

So, given that these HSA bills received support from both sides in a usually politically divided tax committee, they may actually make through the full House. Look for supporters to try to add them to any larger tax bill that might be considered before the congressional session ends, probably in December.

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Being able to merge our his and hers HSA accounts would be a welcome improvement. It's SO DUMB that we currently have to have two accounts just to reach the max amount for married couples who are both eligible for catch up.

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