As health care costs continue to rise, health spending accounts are gaining momentum as vital tools that help many Americans save money by using pretax dollars to pay for health-related expenses. Flexible spending accounts (FSAs) and health savings accounts (HSAs) are two of the most common such vehicles. These consumer-driven spending accounts are particularly useful in conjunction with high-deductible health plans, which are becoming more common among workplace benefits offerings.
As the use of these accounts increases, legislative changes are needed in order to make them effective and accessible to more Americans. Here are three regulatory updates currently on the table to encourage broader use of FSAs and HSAs among American employers and employees:
1. Repeal or amend the “Cadillac Tax”
The excise tax on high-cost employer-provided health plans (also known as the “Cadillac Tax”) was included in the Affordable Care Act to discourage employers from providing excessively rich health benefits at taxpayers’ expense. It places a 40% tax (paid by the employer) on the cost of health coverage that exceeds certain threshold amounts.
The Cadillac Tax has unintended consequences for HSAs and FSAs. In particular, the inclusion of individual employee contributions to these accounts in the calculation of the tax threshold creates a significant disincentive for employers to offer these benefits, for fear of triggering the excise tax.
An amendment to repeal the Cadillac Tax passed the Senate in July 2017, but the corresponding bill has yet to pass the House of Representatives. On Jan. 22, Congress passed and President Donald Trump signed into law a two-year delay on the Cadillac Tax as part of the federal funding bill to end a partial government shutdown. The tax remains delayed until 2022, but a two-year delay has little impact on the many employers who must make decisions about their benefits programs three to five years in advance. In order to maintain and expand the availability of FSA and HSA accounts for working families, Congress must repeal the Cadillac Tax entirely, or at the very least pass legislation to exempt individuals’ contributions to these accounts from the calculation of the tax threshold.
2. Expand the conditions under which HSAs and FSAs can be used
According to a January 2017 survey by Bankrate, 57% of Americans don’t have enough cash to cover an unexpected $500 expense. HSAs and FSAs can help families manage their health costs and decrease the financial burden that results from both expected and unexpected expenses. A bill called the Health Savings Act aims to make HSAs and FSAs more accessible by implementing policy changes around the use of these accounts, including:
- allowing spouses who are both 55 or older to make catch-up contributions to the same HSA;
- allowing individuals who receive primary care services in exchange for a fixed periodic fee or payment, or who receive health care benefits from an onsite medical clinic of an employer, to participate in an HSA;
- including amounts paid for prescription and over-the-counter medicines or drugs as “qualified medical expenses” for which distributions from an HSA or other tax-preferred savings accounts (such as an FSA) may be used;
- increasing the limits on HSA contributions to match the sum of the annual deductible and out-of-pocket expenses permitted under a high-deductible health plan; and
- allowing HSA distributions to be used to purchase health insurance coverage.
3. Support and Enhance FSAs
HSA-qualified health insurance may not be available to or optimal for all Americans, in which case an FSA can be an attractive alternative. In contrast to the HSA, the entire annual FSA contribution amount is available to an employee on day one of the plan year, offering an immediate safety net against out-of-pocket health care expenses for families with with limited disposable income.
The Responsible Additions and Increases to Sustain Employee Health Benefits Act of 2017 would make FSA benefits more accessible to American families by increasing the annual limit on employee salary reduction contributions to $5,000, with an additional $500 for each additional employee (as adjusted for inflation after 2017). The Act also includes a carry-forward provision that allows employees to carry unused funds into the next year. The bill, H.R.1204, was introduced in February 2017 and is currently in committee in the House of Representatives.
With Americans increasingly bearing the financial burden of rising health care costs, consumer-driven spending accounts accessible via employee benefit plans play an important role in helping millions of Americans pay for health care. If implemented, the above policy changes will help extend the reach of these benefits at a time when more and more families depend on them.