Like the House Affordable Care Act (ACA) repeal bill, the Senate’s Better Care Reconciliation Act (BCRA) would loosen a number of restrictions on health savings accounts (HSAs). HSAs are intended to allow individuals to put aside pretax dollars to cover out-of-pocket medical expenses, though in practice they are often used as tax-sheltering devices for the wealthy. A new proposal supported by Sen. Ted Cruz (R-TX) that has been added to the updated version of the BCRA would also allow enrollees to use HSA funds to pay for premiums, in addition to out-of-pocket costs.
Although conservatives generally frame HSAs as a pro-consumer measure to improve affordability, in reality these accounts primarily benefit the wealthy rather than families who have difficulty affording health care costs. In addition, since HSAs currently must be paired with high-deductible health plans, they come at the cost of greater financial risk. The BCRA would push individual market enrollees toward less generous plans with high deductibles; this tradeoff would be particularly extreme for enrollees who currently benefit from the ACA’s cost-sharing reduction subsidies (CSRs), which significantly lower cost-sharing for low-income enrollees and would be eliminated after 2019 under the BCRA.
Allowing HSA funds to go toward premium payments would fail to make up the gap between the financial assistance that lower- and middle-income people would receive under the BCRA versus the ACA. As a result, millions of Americans would still find health insurance much harder to afford under the BCRA.
Current policy on HSAs
Consumers can use money saved in an HSA to meet deductibles and other forms of cost-sharing, such as copays and coinsurance. These funds cannot be used to pay insurance premiums. Currently, people can contribute to an HSA only if their health plan has an annual deductible of at least $1,700 for individual coverage or $2,600 for family coverage. Contributions to HSAs are tax-deductible; earnings within the account and withdrawals made for qualified expenses are tax-free.
As of 2017, the maximum contribution limit for an HSA was $3,400 for individual coverage or $6,750 for family coverage.
HSAs are mostly a tax break for the wealthy
Research and tax data demonstrate that HSAs primarily benefit upper-income households, since they are more likely to use the accounts, have more money available to invest in them , and receive a greater tax benefit by using them.
U.S. Department of Treasury data show that at the end of 2014, just 5 percent of tax filers with adjusted gross income less than $100,000 held money in an HSA, while 20 percent of filers with incomes of more than $500,000 did. HSA users with incomes less than $100,000 had account balances averaging about $1,700, while HSA users with incomes greater than $500,000 had account balances averaging nearly $10,000. The low- to middle-income group contributed an average of $1,800 into their accounts that year; this average includes both direct contributions by a policy holder and those made by payroll deduction from a policy holder’s employer. The high-income group, on the other hand, contributed an average of $5,500.
Upper-income households not only use HSAs more frequently and put more money in them, but they also get a bigger tax break for using them. Since higher-income earners are in higher tax brackets than middle- and lower-income earners, they save more money for each pre-tax dollar they shelter in an HSA. For example, a couple in the highest 39.6 percent tax bracket (with taxable income of more than $470,700) saves 39.6 cents in federal income tax for each dollar they contribute to an HSA. Meanwhile, the vast majority of low- and middle-class families are in the 0 percent, 10 percent, or 15 percent income tax bracket, which means they save either nothing, 10 cents, or 15 cents, respectively, on each dollar they contribute to an HSA.
According to Treasury data, families with incomes less than $100,000 making tax-deductible HSA contributions saved an average of about $400 off their taxes. Families with incomes greater than $500,000 saved an average of more than $2,000 when they made HSA contributions—five times as much.*
Wealthy people also get a proportionately bigger tax break on the investment returns that compound within HSAs. In fact, they are able to avoid not only income or capital gains taxes on investments by sheltering their wealth in HSAs, but also the Net Investment Income Tax (NIIT)—a 3.8 percent tax on investment income paid by people with incomes greater than $200,000 (or $250,000 for couples) that was enacted in the ACA to help pay for coverage expansions. Although the House ACA repeal bill and prior versions of the Senate bill repealed the NIIT, the most recent Senate bill leaves the NIIT in place. Many Republicans, including House Speaker Paul Ryan (R-WI), have suggested that they will seek to repeal the NIIT as part of tax legislation later this year.
The Senate bill expands HSAs, in part by raising the annual contribution limits. The benefits of higher contribution limits are likely extremely skewed to the wealthy. Naturally, high-income families are much more likely to max out their contributions into an HSA because they have more money to put into them. For a family making $50,000, the current contribution limit of $6,750 is 14 percent of their income.
Consider how raising the HSA contribution limits would affect two families: First, a middle-class family earning $50,000 and contributing $1,700 into an HSA, which is about the average contribution for HSA users of that income range. And second, a millionaire household maxing out its HSA.
Assuming the middle-class family is in the 15 percent tax bracket, it would save about $250 by deducting a $1,700 contribution into its HSA. Raising the contribution limits wouldn’t change these savings, although the Senate bill expands the potential uses of HSA. Meanwhile, the millionaire family that maxes out its HSA now contributes the full $6,750, getting a tax break of $2,673. Under the Senate bill, it can contribute $13,100 to an HSA, nearly doubling its tax break to $5,188. Of course, lower- and middle-income families may contribute more to HSAs under the Senate bill—but they are less likely to be able to afford to do so, and even if they do, they would get a smaller tax break.
The bottom line is that HSAs are a tax break that is skewed to wealthy families—one that the Senate bill makes larger.
HSAs in the Senate repeal bill cannot offset less generous tax credits
Like the House bill, the Senate’s BCRA would expand the use of HSAs. It would significantly increase the contribution limits to the maximum out-of-pocket limit amounts for high-deductible health plans, which are $6,550 for individuals and $13,100 for families in 2017. The bill would also permit spouses to make catch-up contributions to the same account, along with other changes.
In addition, it would reduce the tax penalty for withdrawing HSA funds for nonmedical expenses from 20 percent to 10 percent for people younger than age 65. In other words, this would make it easier for people to use HSAs as a tax shelter and later use the funds for nonmedical expenses.
Finally, the updated BCRA would enable enrollees to use HSA funds to pay their premiums. Unlike the House bill, the BCRA would retain the ACA’s premium tax credit structure, but would cut off eligibility at 350 percent of the federal poverty level instead of 400 percent, and would make the credits less generous.
Allowing HSA funds to pay for premiums does not come close to compensating for this reduction in financial assistance for low-income Americans. As described above, the tax benefits of HSAs are upside-down: They give a much bigger tax break to upper-income households in higher tax brackets while doing little or nothing for low- and moderate-income families. Refundable premium tax credits, on the other hand, work by directly reducing consumers’ premium costs. The ACA’s premium tax credits are designed to be most generous for people with lower incomes, who may have the most difficulty affording insurance otherwise.
Not a replacement for cost-sharing reduction subsidies
One often-overlooked but essential component of the ACA is the cost-sharing reduction subsidies, which go to enrollees earning between 100 percent and 250 percent of the federal poverty level—which, in 2017, is $12,060 to $30,150 for an individual in most states—who select certain plans on the marketplace. CSRs are a crucial support to help low-income enrollees afford their cost-sharing, such as deductibles and co-pays. CSRs work by directly upgrading the insurance plan’s actuarial value, or the percent of costs that the insurance company will cover rather than the enrollee. In contrast, HSAs are currently tied to high-deductible health plans. Thus, rather than serving as a replacement for the CSRs, low-income enrollees would be required to take on increased cost-sharing in order to even qualify for an HSA, with the HSAs providing little or no tax benefit.
The BCRA would reduce the actuarial value of the individual market benchmark plan; instead of the benchmark plan covering 70 percent of enrollees’ costs, it would only cover 58 percent. CSR recipients would see an even greater drop in plan value because the BCRA would repeal the CSRs with no replacement. CSRs increase the actuarial value of plans to 94 percent, 87 percent, or 73 percent, depending on a CSR enrollee’s income.
These changes would leave low-income enrollees facing significant higher deductibles and other cost-sharing. As the Congressional Budget Office (CBO) explains, “the deductible for a plan with an actuarial value of 58 percent would be a significantly higher percentage of income. … As a result, despite being eligible for premium tax credits, few low-income people would purchase any plan.”
Illustrating this, CBO estimates that benchmark plans under the BCRA will have deductibles around $6,000. Currently, among benchmark plans under the ACA that have combined medical and prescription drug deductibles, those deductibles average $3,609. For low-income enrollees who receive the highest level of cost-sharing assistance, the CSRs reduce their deductibles to an average of $255. This means that these CSR enrollees would see their deductibles increase by more than $5,700 on average under the BCRA, a more than 2,200 percent increase. An individual who qualifies for the highest level of CSRs earns less than $18,090 per year; thus, a $6,000 deductible would represent at least one-third of their income.
Enrollees who currently benefit from CSRs aren’t the only ones who would be hit hard by this increase in deductibles. Medicaid beneficiaries who would lose eligibility due to the BCRA’s rollback of Medicaid expansion funding or per capita caps on funding would also find coverage with these types of deductibles very difficult to afford. Medicaid beneficiaries pay little to no premium costs and have very low cost-sharing; they would face sharply higher costs on private coverage under the BCRA. For example, for someone currently covered by Medicaid expansion and earning 101 percent of the federal poverty level—or $12,180—a $6,000 deductible would be about one-half of their income.
As this calculation makes clear, low-income enrollees would face significantly higher cost-sharing under the Senate bill. Moreover, as the CBO concluded, few low-income enrollees would be able to afford any health care plan at all.
HSAs are primarily a tax shelter for the wealthy, not a solution to help low- and middle-income people afford coverage. Combined with the elimination of cost-sharing assistance and the downgrading of the generosity of the benchmark plan, the BCRA’s HSA provisions represent a shift toward significantly higher cost-sharing. Far from providing better care, the new HSA provisions will not change the CBO’s projection that the Senate plan would price most low-income enrollees out of the insurance market entirely.
*Authors’ note: When also taking into account HSA contributions made from payroll deductions, the average total income and payroll tax savings on HSA contributions for families with incomes under $100,000 is nearly $600, compared to about $2,300 for families with incomes over $500,000.