110th CONGRESS, LEGISLATIVE ISSUES A - Z

ISSUE: Health Savings Accounts (HSAs) are new products authorized by Congress in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 to give individuals more flexibility and control over the payment of their health care costs. Specifically, HSAs are tax-advantaged accounts that individuals may use to pay for medical expenses that are not reimbursed. For instance, such expenses would include copays, deductibles, and other products and services not covered by one’s insurance plan.

An HSA can be established at a bank or credit union. However, little over 10% of credit unions currently offer them. There are restrictions however. For instance, those who seek to open such accounts and make contributions must have an insurance plan with a high deductible. This deductible must be at least $1,050 for an individual or $2,100 for a family. Those on Medicare are largely excluded from opening an HSA. Another restriction is that HSA account deposits are limited for individuals to either 100% of the deductible or $2,700, whichever is less. For a family, the deductible would be $5,450. Also, the account holder may withdraw funds from the account tax-free to pay for qualified expenses. However, any non-qualifying withdrawal would be subject to ordinary taxation with an additional 10% penalty. This restriction is waived in the event the account holder becomes disabled, dies, or reaches age 65. These rules are somewhat similar to rules governing withdrawals from Individual Retirement Accounts (IRAs).

The contributions made to an HSA by its owner are tax-deductible, as are the contributions made by his or her participating employer (if applicable). The employer is also exempt from paying employment taxes on these contributions. This feature does not apply to contributions made by the HSA owner. All earnings on the account grow tax-free. In addition, unused balances in the accounts can be rolled over to subsequent years and are portable in the sense that the employee can take the HSA with them when he or she changes jobs.

Another innovative feature of Health Savings Accounts is that those age 55 and older are allowed to make "catch-up" contributions ($700 annually) to their HSAs in a manner similar to "catch-up" provisions allowed for Individual Retirement Accounts (IRAs).

The motivation behind the creation of HSAs was to give health care consumers a financial incentive to manage the cost of their individual health care expenditures. The consumer would benefit from shopping around for better-valued health care, reducing unnecessary doctor’s visits and medical procedures, and examining medical bills for errors and overcharges. In creating these accounts, the Congress asserted that this would lead to a decrease in its outlays in federally funded health care programs.

CUNA POSITION: CUNA supports the expansion of HSAs as a way of providing credit union members with a way to build wealth while also better managing personal medical costs. CUNA also supports an aggressive effort to encourage credit unions to offer HSAs, as only 15% of all HSAs in 2006 were held in credit unions.

OPPOSITION: Many argue that the accounts would shift more costs to employees and away from the employer-sponsored health care plan model.

IMPACT ON CREDIT UNIONS: Credit union members benefit from these accounts and often urge their credit unions to offer them if they don’t already do so. Credit unions benefit from offering HSAs because of the additional deposits that follow as a result.

STATUS/OUTLOOK: On November 1, 2005, the President's Advisory Panel on Federal Tax Reform recommended that HSAs and certain other employer-based health care reimbursement accounts (like Flexible Savings Accounts) be consolidated and replaced with "Save for Family Accounts" for health care and education costs as well as a home down payment. The new accounts would also replace Coverdell Education Savings Accounts, section 529 qualified education plans, and Archer Medical Savings Accounts. These new accounts would be less restrictive by not placing income, age, or marital status criteria on those that choose to participate. The accounts would permit individuals to contribute up to $10,000 annually and that amount would be indexed for inflation in subsequent years. The accounts would grow tax-free but contributions would not be tax-deductible. Once the account holder reaches age 58 or has a qualified distribution, the withdrawal would not subject to federal taxation or penalties. One final attractive feature in the plan would be that participants would be able to withdraw up to $1,000 annually for any reason and not face a tax penalty.

It is an almost certainty that no legislation expanding HSAs will pass the Congress in the next two years as the current Congressional leadership opposes these types of accounts.

CONTACTS: John Hildreth, (202) 508-6724, jhildreth@cuna.coop.

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