House Ways and Means Approves Legislation to Expand Use of HSAs

In an effort to expand eligibility for those wishing to establish and contribute to health savings accounts, the House Committee on Ways and Means approved legislation on September 28 with the goal of making out-of-pocket health care costs more affordable. 

The bipartisan HSA Improvement Act and the HSA Modernization Act both aim to address “outdated bureaucratic barriers and red tape” that have stood in the way of individuals making the most of these tax-advantaged accounts, according to a release.  

Representative Jason Smith, R-Missouri, the chair of the committee, wrote in a statement that 78% of HSAs are owned by taxpayers making less than $100,000, which he said exemplifies that the accounts are a useful tool for middle- and low-income families. 

“However, we can help those same families better utilize HSAs, save more to cover more of their health care costs, and make more of their fellow citizens—like working seniors, veterans, and Native Americans—eligible to partake in the tax savings and flexible care options provided by HSAs,” Smith stated.  

An HSA must be paired with a high deductible health plan, and it allows a participant to set aside money on a pre-tax basis to pay for qualified medical expenses. The untaxed funds can be used to pay for deductibles, copayments, coinsurance and some other expenses.  

Devenir reported last month that the HSA industry has accumulated $116 billion in assets, as of the first half of 2023.  

However, a 2023 Voya Consumer Insights and Research study showed that knowledge around HSAs is still lacking among employees. The study, which compared employee HSA knowledge from 2020 with 2023, found that while general understanding that these accounts can be used to pay for health care expenses in retirement increased noticeably (to 55% from 43%), knowledge of other uses and benefits, such as using an HSA as an investment vehicle and only being able to contribute when enrolled in an HDHP, showed no discernable change. 

Voya suggested that employers collaborate with intermediaries—such as benefits brokers, financial professionals and consultants—and workplace benefits and savings providers to educate participants on HSAs and implement a program designed for a diverse employee population.  

The HSA Improvement Act 

The legislation (H.R 5688), sponsored by Representatives Earl Bluemenaur, D-Oregon, and Lloyd Smucker, R-Pennsylvania, proposes wider access to HSAs, as it would enable individuals who use key health services, such as direct primary care arrangements or worksite health clinics, to contribute to an HSA and transfer flexible spending account or health reimbursement arrangement dollars into an HSA.  

In addition, the bill would eliminate a prohibition against an individual establishing an HSA if their spouse has an existing flexible spending arrangement. The bill also would allow individuals to convert their own flexible spending or health reimbursement arrangement dollars into an HSA. 

HSA Modernization Act 

In order to better align with what an individual might owe in total out-of-pocket expenses and deductibles, the HSA Modernization Act, backed by Representatives Beth Van Duyne, R-Texas, proposes increased contribution limits for HSAs. 

The maximum HSA annual contribution for self-only coverage is $3,850, $7,750 for family coverage. The legislation would increase the HSA contribution limit to equal the sum of the annual deductible and out-of-pocket limitation permitted under a HDHP. 

For example, with this legislation in place, the basic limit for 2023 would be $7,500 for self-only coverage and $15,000 for family coverage. Additionally, as present law allows, the basic contribution limit is increased by $1,000 for an eligible participant who has reached age 55 by the end of the tax year.  

The HSA Modernization act also would expand eligibility to participate in HSAs for individuals who are veterans receiving care through the Veterans Administration, working seniors on Medicare, Native Americans and those enrolled in certain health benefit exchange plans.  

Currently, anyone enrolled in any part of Medicare is disqualified from contributing to an HSA. According to a LinkedIn post from William Stuart, director of planning and business analysis at Voya, this provision would strike Medicare from the list of disqualifying coverage, thereby allowing anyone otherwise HSA-eligible to remain eligible to fund an HSA. 

Spouses  also could contribute “catch-up” funds into the same health savings account, rather than having to establish separate accounts for such contributions.  

Another provision would allow the use of an individual’s HSA funds to cover health care services that occurred up to 60 days before the HSA was established.  

The proposal would be effective for tax years beginning after 2025, and the Joint Committee on Taxation estimated that this bill would cost an estimated $44 billion over 10 years. 

Both bills now move to the full House of Representatives for consideration.