Benefits Business

WILL GOVERNMENT STIFLE HSA GROWTH?

Proposed tax code changes would require increased administrative oversight

By Len Strazewski

Casinos, escort services, and bowling alleys aren’t typical employee benefits payable from a Health Savings Account (HSA), though some workers might like them to be. The tax-advantaged accounts are supposed to be used exclusively for doctor visits, medical tests and prescribed health treatments.

However, some alleged misuse of the accounts and a report published by the Government Accountability Office earlier this year may soon make consumer directed health plans (CDHPs), including HSAs and Health Reimbursement Accounts (HRAs), much more complicated and much tougher sells to employers.

In April, Rep. Charles Rangel, (D-N.Y.) introduced the Taxpayer Assistance and Simplification Act (HR 5719), which proposed to amend the tax code to require substantiation of all HSA-eligible medical expenses by a third-party administrator. HSA expenditures are presently reported by individuals to the Internal Revenue Service, which can, but is not required to, seek substantiation by audit.

The bill would make HSAs subject to the same level of substantiation as Flexible Spending Accounts (FSAs), an older and more restrictive tax-advantaged health care account. The addition of a TPA would add extra scrutiny of the transactions and their eligibility, but also an additional layer of administrative bureaucracy and, potentially, expense.

Why the greater scrutiny? Legislators who support the measure point to the recent report from the GAO that indicates that HSAs were not as broadly used as anticipated by Congress and have been favored primarily by wealthy individuals.

The GAO report said that while HSA enrollment has grown from 438,000 in the first year of eligibility to about 4.5 million in 2007, more than 40% of individuals who qualified for HSA enrollment did not open an account and more than 20% of those eligible had no plans to open an account.

Among the reasons cited by individuals for not opening accounts included a general lack of information or understanding of HSAs, insufficient money to open an account and a belief that these accounts were not needed, the GAO said.

And despite the growth in the number of individuals enrolled, HSA enrollment still accounted for only about 2% of all private health care coverage.

The agency focused in on usage data from 2004 and 2005 tax returns which indicated rapid growth in HSA withdrawals for medical expenses. However, the agency noted that the tax filers who reported HSA withdrawals represented adjusted gross income far above the national average. The average annual adjusted gross income of HSA users in that period was $139,000, compared to $57,000 for all other filers. Contributions totaled more than twice the level of withdrawals.

House Ways and Means Subcommittee Chairman Pete Stark (D-Calif.) interpreted the GAO report data as indicating that HSAs have generally been misused as a way of providing broader access to health care and have become another resource for wealthy individuals only.

“The GAO confirms that HSAs are not the way to meet the health care needs of most Americans. Instead, they are a tax shelter for people whose average incomes are nearly triple that of average tax filers,” he said in a statement in support of the legislation.

Rep. Henry A. Waxman (D-Calif.), House Oversight and Government Reform Committee Chairman, also supports the bill. “HSAs clearly are attractive to higher income people who are looking for tax shelters. But they aren’t the answer for providing adequate health insurance coverage for the average American.”

Waxman also pointed to the high ratio of contributions to withdrawals reported by the GAO as evidence that the accounts were being used more as tax shelters than health claims payment.

In their statement, the legislators also cited examples of misuse that were not included in the GAO report. These examples, taken from an unidentified employer, included “escort services, casinos, bowling facilities and other non-health related areas.”

Employee benefits industry leaders oppose the legislation. In a letter to House Speaker Nancy Pelosi, James Klein, president of the American Benefits Council in Washington, D.C., an employee benefits industry group, said the bill “will unnecessarily increase administrative costs and complexity and adversely affect individuals who depend on high deductible health plans, coupled with HSAs, for health coverage.

“As the cost of health care continues to increase faster than wages, Congress should not place additional costs and administrative burdens on workers, health care plans or the employers who sponsor those plans,” he said.

Klein noted that while the GAO report indicated some misuse of the accounts, the great majority of HSA fund withdrawals—90%—were for qualified medical expenses. “There is no evidence that current tax penalties and enforcement are not working,” he said.

The HSA Working Group, a task force representing 33 health plans, employers, national insurance brokerages and industry groups including the Council of Insurance Agents and Brokers and America’s Health Insurance Plans, also oppose the bill and challenge the GAO findings. The group notes that the GAO report was based on an analysis of 2005 usage withdrawal data.

“We strongly believe that the GAO report’s underlying conclusions that the HSAs have served as mere tax shelters for the wealthy are not supported by a clear picture of the HSA experience since their creation,” the group wrote to Congress. “One of the significant limitations of the GAO report is that the 2005 data analysis is a very thin slice of the lifespan of HSAs, as it was only the second year of the HSA program and only one million lives were covered.”

The group estimates total HSA enrollment of more than 6 million in 2008, a 35% gain over 2007.

The HSA Council in Washington, D.C., a joint organization of the American Bankers Association and its insurance affiliate, the American Bankers Insurance Association, attacked the bill provisions directly, charging that the text provides no instructions for HSA trustees and custodians (who are usually financial service companies) about how to manage and restrict withdrawals that may be improper or how substantiation rules would apply to funds accumulated before the bill would be enacted.

CDHPs don’t need another obstruction to their marketability. Even without the additional administrative burdens posed by the pending legislation, employee benefits producers are already having difficulty finding an audience for the long-term values of HSAs as a retirement health care savings tool.

In May, Guardian Life Insurance Co. of America in New York conducted a telephone survey of 473 working adults about their health care benefits. About two-thirds of respondents said that health plans in general, and the benefits they provide, are difficult to understand.

Only about half of respondents said they were aware of HSAs and the older savings model, Flexible Savings Accounts (FSAs). About 40% said they were aware of HRAs.

However, many respondents could not confirm that they understand the value of HSAs for other than immediate health care costs. Fewer than 50% of Baby Boomer age respondents are currently planning for or believe they are financially prepared for, health care costs in retirement. *

The author
Len Strazewski has been covering employee benefits issues for more than 20 years and is employee benefits editor of Human Resource Executive magazine. He has an M.A. in Industrial Relations from Loyola University.