Don't Mess With Taxes

Sometimes the cost of treating your illness makes you feel worse. (Photo by cottonbro studio)

Not so long ago, the Affordable Care Act (ACA) was a hot federal campaign issue. Republican congressional and presidential candidates vowed to repeal and replace Obamacare, the originally pejorative political term that simply became an ACA synonym.

Health care did come up briefly during the debate this week of presidential candidates Kamala Harris and Donald Trump. The former president, who once promised a new health program within two weeks, said he had “concepts of a plan” to replace Obamacare.

Meanwhile, six Capitol Hill lawmakers from both major parties have introduced their own health care proposal. It's not a replacement for Obamacare, but rather another tax-favored way to help folks deal with medical costs.

HOPE for bipartisan plan: The Health Out-of-Pocket Expense (HOPE) Act, H.R. 9394, would create a tax-advantaged savings account to help those with most types of insurance coverage to save for the health care costs they still must pay out-of-pocket.

A single owner of a HOPE health savings plan could contribute up to $4,000 a year. The amount is double for families. Plan enrollees’ employers also can contribute to the accounts.

Utah Republican Rep. Blake Moore is the lead sponsor of H.R. 9394. Joining Moore in cosponsoring the HOPE Act are Reps. Jimmy Panetta (D-California), Brian Fitzpatrick (R-Pennsylvania), Brad Schneider (D-Illinois), Adrian Smith (R-Nebraska), and Raul Ruiz (D-California).

Tax-saving help to cover health costs: The group’s explanation of their bill compares it to a Roth savings account that provides certain tax advantages and investment options to help enrollees save for future health care expenses.

Below are the highlights.

• Anyone with qualifying coverage, including in the commercial market, Medicare, Medicaid, the Indian Health Service, and other sources of health care coverage are eligible to contribute to a HOPE Account.

• Individuals’ contributions would not be deductible. However, employer contributions to accounts are deductible to the employer. Plus, the company amounts of up to 50 percent of the annual limit would be excluded from the adjusted gross income of single workers earning $100,000 or less in gross income ($200,000 or less for married jointly filing couples).

• HOPE account earnings remain tax-free if the funds are used for qualified medical expenses.

• Workers’ contributions to certain other tax-favored health-related savings vehicles will reduce the maximum contribution to a HOPE Account that year.

That last bullet point, and the bill’s legislative language, cite specific existing health-related accounts that could reduce HOPE contribution amounts.

They are a medical flexible spending account (FSA); health savings account (HSA); health reimbursement arrangement (HRA); and Archer Medical Savings Account (MSA).

Here’s a brief look at how these current medical accounts work.

Medical flexible spending account, or FSA: A medical FSA is a popular workplace benefit. Workers can set up an FSA to pay certain out-of-pocket medical expenses not covered by their workplace-provided medical insurance. The employee contributes through payroll deductions to the FSA, up to an annually inflation adjusted limit, which is $3,200 for 2024 The worker’s contribution amounts are taken out before taxes are calculated, thereby saving them some tax dollars.

Generally, FSA funds must be used by the end of the benefit year or they are forfeited. However, this use-it-or-lose-it rule can be sidestepped if the workplace offers enrolled employees a grace period (March 15 for plans that end at the end of the calendar year) or a limited rollover option for the next benefit year.

Health savings account, or HSA: An HSA can be opened only by individuals who have a high-deductible health plan (HDHP). HDHP participants and their employers both can contribute money to the HSA. Employer contributions to HSAs are not included in the employee’s income and are not subject to employment taxes. HSA money used to pay for qualified medical expenses is tax-free.

The amounts that can be put into an HSA also are adjusted annually. The 2024 HSA limits are $4,150 for those with self-only HDHP coverage, and $8,300 for those with family coverage. For 2025, you can contribute up to $4,300 to an HSA if you have individual HDHP coverage, and the family coverage HSA maximum next year is $8,550.

Policy holders who are 55 or older by Dec. 31 also can sock away an additional $1,000 for the tax year. However, this catch-up contribution amount for older account owners is a not adjusted annually for inflation.

Regardless of how much you put into an HSA, the money belongs to you, the plan participant, and it can stay in you HSA until you use it. This gives HSA owners access to the tax-favored funds for medical expenses even if they change jobs or quit working completely.

Another HSA benefit is that once you reach age 65, you can withdraw funds and use them for any, not just medical, reasons. Non-medical use, however, will require you to pay ordinary taxes on those amounts.

Health reimbursement arrangement, or HRA: An HRA is an employee benefit plan used to reimburse employees for certain medical expenses that they and their dependents incur and that are not covered by insurance. An HRA is funded solely by the employer, not through any employee contributions, and is tax-free to the worker.

End-of-benefit-year balances can be carried forward to the next, but unlike an HSA, an HRA is not portable. Workers can't take HRA funds with them when they leave their jobs. For 2024, the maximum HRA benefit amount is $2,100. It goes to $2,150 in 2025.

Archer Medical Savings Account, or MSA: An Archer MSA is a tax-exempt account that pays medical expenses in conjunction with a high-deductible health plan. It was named after former Texas Republican Rep. Bill Archer's support of the plan. Archer MSAs were discontinued for years after 2007, meaning only active participants as of that tax year may have an account. Individuals who own Archer MSAs might find it more beneficial to roll those accounts over into HSAs.

Check with your workplace as to which of these accounts it offers. Your benefits office and/or tax adviser can help you decide which available ones are best for you, and your family’s, medical and financial situations.

Questions, questions, and more questions: Anything that gets members of Congress from opposing parties to work together is to be lauded. But the introduction of the HOPE account act raises a question often asked of all types of legislation: Is it really necessary?

In this case, do we need another health-related savings account, since the multiple established health care accounts cited earlier have been working for years?

Won’t the associated Internal Revenue Service rulemaking and oversight of HOPE accounts add to that agency’s costs, as well as add another administrative concern for companies?

And not to be too cynical, is the timing of this bill partly because all House members are up for re-election on Nov. 5?

We’ll see if these and other potential questions are answered when (if) H.R. 9394 is considered by the House Ways and Means committee to which it’s been referred. That likely won’t happen before Election Day, or even in the lame duck session that follows.

If this current episode of legislative congeniality survives the election, perhaps we’ll see the HOPE account bill reintroduced when the 119th session of Congress convenes next year.

You also might find these items of interest:

• HSAs, the champion when it comes to tax break multitasking
• Beware of products touted as eligible for tax-favored medical savings plans
• Do you have more time to use FSA money? Here are 6 spending suggestions

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