Many recent legislative proposals would change the rules governing health savings accounts.

One newly introduced piece of legislation proposes to remove the exception that allows penalty-free access to HSA funds for any purpose once the account owner reaches age 65. Proposals would also impose income-based restrictions on the deduction for HSA contributions and would require that the reimbursement window close within two years of the date that the qualified medical expenses were incurred.

Substantiation requirements would also be imposed to require the account owner to prove that the reimbursements were for qualified medical expenses.

We asked two professors and authors of ALM's Tax Facts with opposing political viewpoints to share their opinions about proposals to change the rules governing HSAs.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Byrnes

Bloink

Their Reasons:

Byrnes: Many of these proposals would prohibit penalty-free access to HSA funds after age 65 for non-medical expenses — which makes absolute sense given the purpose of HSAs. HSA funds should be solely designated to cover qualified medical expenses. Under current law, taxpayers who have reached age 65 have penalty-free access to their HSA funds for any purposes — whether to buy a new car or go on a vacation. That's not a system we should seek to continue in terms of offering tax preferences.

Bloink: We allow penalty-free access to HSAs once taxpayers have reached Medicare eligibility age because that way, we're encouraging taxpayers to fund HSAs during their working years. With our current system, individuals understand that they'll be able to access their funds for whatever reason they choose once they are enrolled in Medicare. Our current system for penalty-free HSA access is working, and proposals to make these changes would only make HSAs less valuable in the long run.

Byrnes: The definition of "medical expenses" for IRC purposes is extremely broad. We can't say that we're unduly restricting access to HSA funds by older Americans when we require that those funds be used only to cover qualified medical expenses (or, in the alternative, pay a penalty). Inevitably, medical expenses that qualify under the definition will arise — and if we give unfettered access to HSA funds, we're not encouraging individuals to plan for those expenses.

Bloink: If we remove penalty-free access to HSAs upon reaching Medicare eligibility age, we're deterring taxpayers from saving to fund their own health care expenses. The possibility of a "use it or lose it" situation is always a deterrent when it comes to savings options. Making this change would absolutely serve to deter taxpayers from using the valuable health savings account option.

Byrnes: We're providing a powerful tax benefit to taxpayers with the HSA savings option — an immediate tax deduction upon funding the account, tax-free growth for as long as the taxpayer chooses to leave the funds in the account and tax-free access once the taxpayer incurs qualified medical expenses and accesses the account for reimbursement. There's no reason we shouldn't strengthen the system to require that taxpayers absolutely use the funds to cover qualified medical costs or incur a penalty.

Bloink: Most taxpayers who fund HSAs already use the dollars to cover qualified medical expenses. There isn't a need to impose restrictions on what those taxpayers can do with their HSA funds if they're lucky enough to reach Medicare eligibility age without the need to tap their HSAs. The worry for many taxpayers in funding HSAs is tha tthey'll reach an age where their health costs are covered by Medicare and so will have funded HSA accounts that they can't access without incurring penalties.T axpayers who choose to access their HSAs for non-medical purposes after age 65 are taxed on those amounts — there's no need to impose an additional penalty, which would only deter Americans from funding these accounts in the first place.

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