Health Savings Account Blog

HSA Account holders and employers are allowed to contribute untaxed funds to their Health Savings Accounts under the Medicare Modernization Act of 2003 as long as the insured individual is not covered by other health insurance or eligible to be claimed as a dependent on someone else’s tax return. Distributions from the account used to pay for “HSA qualified medical expenses,” including over-the-counter drugs, are tax-free.

These accounts are designed to be more attractive as a savings mechanism than medical spending accounts or health care reimbursement accounts set up under previous laws. Contributions to Health Savings Accounts not expended by the end of the year can be rolled over indefinitely, and they can be used to pay for any qualified medical expenses incurred after the account was established. In addition, they have the potential to provide more tax savings than IRAs or 401(k)s, for which either contributions are made with pre-tax dollars (in traditional accounts) or withdrawals are made tax-free (from Roth accounts) — but not both.

The Manhattan Institute study’s author, Senior Fellow Benjamin Zycher, compared the rate of adoption for Health Savings Accounts in their first four years with early participation in IRAs and other defined-contribution retirement plans. While acknowledging that the data available on early participation in IRAs as a percentage of all pension plans are difficult to interpret and don’t match the data on participation in Health Savings Accounts as a percentage of all health insurance, Zycher found that the percentage of people covered by private insurance who were enrolled in HSA-qualified plans in their early years closely corresponds to the percentage of total retirement assets found in IRAs in their beginning years. “The data on the whole suggest that HSA-qualified health coverage has the potential to expand at least as sharply over time as IRAs and defined-contribution retirement plans did, assuming conducive legal and regulatory developments,” he wrote.

The report noted that relatively few consumers are “extremely” or “very” familiar with Health Savings Accounts, suggesting there is “room for improvement” in adoption of these plans. On the positive side, the study found that premiums for HSA Insurance are 10 percent to 40 percent lower than those for other types of plans, and that a wide range of preventative services are available to policyholders on a “first-dollar” basis, without having to meet the plans’ high deductibles. Moreover, it said, “less than half the funds in HSA accounts in 2007 were expended on health care, demonstrating these accounts’ viability as savings vehicles.”

Zycher noted that Congress’s purpose in authorizing tax-free accumulation and withdrawal of funds in Health Savings Accounts to pay for medical care was to encourage more people to become “consumers” of health care services so they would be more cost-conscious and help bring the overall costs of medical care down over time.

To accomplish that goal, participation in High Deductible Health Plans (HDHPs) must grow at a meaningful rate, and he suggested several policy changes that would likely improve the plans and make them more appealing to consumers. For example, he suggested making employers’ contributions to Health Savings Accounts exempt from payroll taxes and allowing individuals to deduct the premiums for their HDHPs from their taxable income. In addition, he recommended lowering the deductibles for hospital and chronic care, since these are not generally discretionary expenditures and subjecting them to the high deductibles is unlikely to discourage excessive consumption of these services.

Also important, according to Zycher, is making the plans easier for people to understand. “This country’s experience with retirement plans suggests that greater legal and regulatory simplicity combined with looser eligibility standards and more generous limits on the contributions” could make the plans more popular, he wrote.

Learn more about Health Savings Accounts at HSA for America.