Health savings accounts (HSA) were introduced in 2003 by President George W. Bush, and they were understandably confused with flexible spending accounts (FSA), which are offered by employers, right from the start. HSAs work differently from flex accounts. Once you establish a health savings account, you can use the money for any medical expenses you choose. These accounts aren’t tied to your employer, and you’re free to contribute to them when you change jobs. There are several benefits to using an HAS, but most people aren’t familiar with how they work. President-elect Trump wants to make these benefits even better for the average consumer by encouraging people to use HSAs to cover medical expenses.
The Current State of HSAs
Health savings accounts can be difficult to decipher because much of their benefit centers on taxes. Here are the basic features of an HSA:
- You can make tax-free deposits up to a maximum amount.
- They’re tied to high-deductible health insurance plans.
- Their interest component builds value over time.
- They offer tax-free protection when money is deposited, both for the interest income that accrues and when the money is used.
- You can only use funds from an HSA to cover medical expenses that aren’t covered by insurance or to pay bills that accumulate under the deductible.
The primary difference between a flexible spending account and an HSA is that the HSA is not tied to an employer. A flex spending account also must be used completely by the end of the calendar year while an HSA can carry over from year to year. Because of the ability to build interest income on deposits, some people are using HSAs to save money towards their health care needs during retirement. Donald Trump wants to expand that ability and give everyone the chance to utilize HSAs.
Changes Trump Wants to Make
Right now, access to HSAs is limited only to those who have health insurance plans with a deductible of $1,300 or more for individuals and $2,600 or more for families. While an HSA can accrue, it cannot be passed down within an estate to anyone outside of the deceased’s family. Trump wants to change some of those rules and add a few of his own. Individuals are limited to a maximum of $6,500 per year in their HSAs while families have a limit of $6,750 per year. Under Trump’s plan, HSAs could be strengthened and improved by:
- Raising individual maximums to $6,550 per year and family maximums to $13,100 per year
- Repealing the “Cadillac tax” that would put a tax on HSAs used for high-cost plans
- Offering government subsidies to people who don’t have HSAs offered as part of their employer-sponsored coverage
- Opening up HSA access to every American
- Marketing HSAs more aggressively so that people know what they are and how to use them
Trump also wants to make HSAs more estate-friendly. Right now, if an HSA is left to someone via a will or trust, there are taxes imposed on the funds, especially if the beneficiary isn’t a family member. Trump would remove those taxes and allow HSAs to be passed on through estates without tax restrictions. The primary goal behind HSA expansion is to help people to save tax-free money for their medical insurance needs, which could help to offset some of the potential losses of insurance under Trumpcare.
HSA changes are a significant part of Trump’s 7-point plan for health care reform, and he talked about it repeatedly on the campaign trail. But there are problems with HSAs even when you allow for expansion and less stringent taxing regulations, particularly for people who won’t be able to use them at all.
Who Will Really Benefit from Trump’s HSA Plan?
Families with disposable income could put as much as $13,100 per year into their HSA and watch it accrue interest year after year. As the principal in their HSA grows, so does its value. By the time the parents of the family get to retirement age, they could have a large HSA that would be extremely helpful in offsetting the rising medical costs that come with aging.
But what if an individual or family did not have any extra money to put into an HSA? How would low-income families – particularly those who are either struggling to pay health insurance premiums or don’t have health insurance at all – going to benefit from Trump’s new HSA plans?
One of the biggest criticisms of Trump’s health care reforms is that they benefit the rich. From cutting back funding on Medicaid to eliminating many of the tax subsidies the ACA offered to help low-income families pay for health insurance, Trumpcare threatens to alienate a good portion of Americans and take health insurance away from millions of people.
It’s true that strengthening HSAs will make them more attractive, but they’re only going to be attractive to people who can already afford to set money aside each year for health care expenses. Americans don’t save well as it is, a fact that research continues to support. In fact, 63 percent of American families don’t have enough money in savings to cover an unexpected $500 emergency. About a third of families in the U.S. don’t have any kind of savings at all. This is just the way of life for millions of people, so offering consumers “better” HSAs when they can hardly afford to put anything away, let alone anything for medical care, is an absurd solution to the problem of rising health care costs.
If Donald Trump can include some tax subsidies or government contributions to HSAs based on an individual’s income, then there may be value in his plan for everyone. But at this point, Trump has only offered to make HSAs better for the people who can afford them and has not offered any relief for those who cannot.