On December 20, President George W. Bush signed into law a bill Congress passed in the final hours of its 2006 session two weeks earlier–one that not only creates a series of tax breaks for consumers but also modifies a three-year-old law in ways that will make health savings accounts (HSAs) more attractive to employees and employers alike.
The Tax Relief and Health Care Act of 2006 (H.R. 6111) incorporates several important elements of an earlier bill, the Cantor-Ryan HSA expansion bill. The House of Representatives passed it just before adjourning on December 8, and the Senate approved it at about 4 a.m. EDT on December 9.
“This is an outstanding quack from the lame-duck Congress,” said John R. Graham, director of health care studies at the Pacific Research Institute, a free-market think tank in San Francisco. “The only question is why they took until the last minute to do what we’ve been advocating for years. By making HSAs more attractive to prospective enrollees, this will keep up the momentum toward consumer-driven health care.”
“The HSA administrative provisions passed by Congress are important changes that will add to the success of HSA products,” agreed Nina Owcharenko, a senior policy analyst at The Heritage Foundation’s Center for Health Policy Studies. “These changes clear up much of the red tape that can make HSAs complicated and burdensome to both employers and individuals.”
In addition to extending tax provisions that were set to expire at the end of 2006 and offering tax credits to employers who hire difficult-to-employ individuals–such as younger workers, welfare recipients, and ex-convicts–the new law updates federal HSA provisions in several ways.
First, it allows HSA users to roll money over from other tax-favored accounts, such as their companies’ health reimbursement accounts, individual retirement accounts, and flexible spending accounts.
The law also increases HSA annual contribution limits. The existing law stipulated users could only make deposits totaling the amount of their health insurance policy deductible over the course of each year. Now, as long as the insurance policy qualifies for HSAs, users may contribute the maximum $2,700 per year for an individual or $5,450 for a family.
“This is a real boost for those with higher health costs and lower incomes,” said Laura Trueman, executive director of the Council for Affordable Health Coverage, a health care advocacy group in Washington, DC. “It will be interesting to see how many individuals and employers take advantage of these provisions.”
Employers will be able to contribute more money to the HSAs of lesser-paid employees under the new provisions.
The new law also requires the U.S. Treasury Department to publish cost-of-living adjustments for HSA contributions and deductible amounts in March, rather than August.
“Employers need to know this earlier in the year so they can get their health insurance contracts and literature printed for the next benefit year,” explained Grace-Marie Turner, president of the Galen Institute, a free-market think tank in Virginia.
“The new provisions should simplify the use of HSAs and make them more attractive to larger numbers of people,” said Greg Scandlen, founder of Consumers for Health Care Choices, a membership group based in Hagerstown, Maryland.
However, Scandlen said, “It would have been better if they had been enacted during the summer so the new rules could be in effect for the new plan year beginning on January 1, 2007. As it is, it will take a while for vendors to change their procedures and plan documents, so we’ve missed the big enrollment surge this year.
“Still, HSAs are growing dramatically even without these changes,” Scandlen noted. “Enrollment has at least doubled in the past year and is now approaching 10 percent of the private benefits market. Once market penetration reaches 20 percent, there will be no turning back. That is the tipping point for free-market reforms.”
Since HSAs first became available in 2004, more employers have begun shifting health care costs to workers, leading to a surge in the accounts’ popularity. In late 2004, about 500,000 individuals had them; currently more than 3 million use them.
Congress could have enacted other measures to make HSAs even more accessible, Trueman said.
“I would like to have seen Congress include provisions to make HSAs and all health insurance more affordable for those who currently lack coverage, either through health care tax credits or by equalizing the tax treatment for those who currently do not have employer-provided health coverage,” Trueman said.
“Right now that group has to foot the entire bill for their health insurance, and they get no tax break for the premiums they pay,” Trueman noted. “Those costs should be tax-deductible.”
Karla Dial ([email protected]) is managing editor of Health Care News.