Unintended Consequence of the Affordable Care Act

The originators of the Affordable Care Act (ACA) never intended to encourage the use of Health Savings Accounts, (HSA). After all, ACA’s proponents view HSAs as a tax break for the wealthy. But they are trending upward across the general population with 16 million total accounts in 2015, (22 percent yearly increase) containing over $30 billion in assets­­­­ – figures that are expected to double in the next few years.

What is driving HSA adoption? Answer: Paying for health costs with tax advantaged dollars.

Health insurance deductibles and out-of-pocket costs have skyrocketed under the ACA, leaving employees to pick up more and more of their health care costs. The politically correct term for this phenomenon is an increase in the “employee cost share,” which doesn’t make it sound so bad.

Employees picking up a larger cost share results from a trade-off of lower health insurance premiums for higher deductibles and out-of-pocket costs. The tax differences between paying premiums, which are typically paid with tax preferred payroll deductions, and out-of-pocket costs, typically paid with after tax dollars, compounds the financial burden on employees.

There are two ways for employees to pay for out-of-pocket costs with before tax dollars: Flexible Spending Accounts (FSA) and Health Savings Accounts (HSA). FSAs can be effective, but require the employee to accurately predict their qualifying health care costs for the year ahead. Employee FSA contributions have an insurance risk mechanism requirement, commonly referred to as “use it or lose it.” The employee is at risk by losing contributions they do not spend each year; so FSA under- or over-funding negates some of the advantages. The ACA also cut FSA contribution limits approximately in half and trimmed down the list of items that qualify for reimbursement, making them a bit less attractive than before.

A key HSA advantage is there is no use it or lose it. Contributions stay with the individual, paying out-of-pocket costs through job changes and through retirement. HSAs have a triple tax benefit: A deduction when money is contributed, tax-free investment compounding, and tax-free withdrawals. If the HSA withdrawals are not used for qualified health care expenses, they’re treated similar to an IRA, so it’s common to see them advertised as Health 401(k)s or Health IRAs.

Although far from many people’s minds, saving for post-retirement health care costs is a necessity. While most people will not pay Medicare Part A premiums, a recent HealthView services report estimates a 55- year old couple, retiring in 10 years, needing over $450,000 to cover Medicare Parts B & D, dental, vision and other out-of-pocket costs through their life expectancy.

The best way to pay for a portion, or preferable all of this, is with HSA dollars.

Congress has delayed the Cadillac Tax until 2020. If and when it goes into effect, many more employees will be driven to lower premium plans with higher out-of-pocket costs, further fueling the adoption of HSAs.

HSAs require three things: A high-deductible health plan (HDHP), a bank/custodian account and an administrator. A qualified HDHP has a minimum deductible of $1,300 with no first dollar coverages. In the ACA environment, $1,300 is not considered all that high of a deductible; for example, most carrier’s minimum deductible offerings are $2,000. CalCPA Health offers HDHPs of $1,500, $2,500 and $3,500 with higher deductibles on the way. In many instances the bank and HSA administrator are the same entity and can be integrated with the health plan. HSA contribution limits are generally increased by the IRS annually.

In 2017 individuals can contribute $3,400 and $6,750 for a family with an additional age 55-plus catch-up of $1,000.

The many facets of HSAs cannot be communicated in this short article so additional details are available at www.calcpahealth.com/HSA.

California, New Jersey and Alabama do not recognize HSAs. So while the tax effect in these states is less, the federal tax treatment still makes HSAs advantageous. CalCPA Health members adopt HSA plans at about 10 times the average of non-CPA industries. Our theory, although not statistically obtained, is that CPA firm employees better understand the tax and long-term savings implications of using HSAs (than the general population). Accordingly, CalCPA Health has been proactive in providing CalCPA members with HSA information and programs.

In the long run, this unintended consequence of the ACA may turn out well for the health insurance industry, employees and retirees as consumers take more control of health care spending and save for retirement.