Health Savings Accounts (HSA) are going to be a big component of whatever passes as Republican health policy over the next couple of years. An HSA is a tax advantaged savings account that can be used to pay for out of pocket expenses and premiums. They are initiated and contribution eligible when the owner is covered under a high deductible health plan (HDHP). One of the primary tax advantages for an HSA is that contributions are tax free. Growth (as long as it is used for qualified medical expenses) is also tax free. I want to focus on the first part though.
My wife was notified of her bonus yesterday. Her firm also gave her a cost of living and merit based pay bump. She’ll see her bonus in the first check in January. I was sitting in a meeting where I barely needed to pay attention so I started sketching out my family’s 2017 budget. 2017 is looking good for us. I figure that I’ll still do some soccer but the four year plan to trade quantity for quality will continue as I value my family time more than soccer time as I no longer need it to pay the mortgage. My son will be out of daycare this summer so we are seeing a major expense drop and our incomes are going up. As my son leaves daycare, we’ll lose the value of the tax free benefit of the flexible spending account and that thought made me angry. Not angry at losing a tax benefit but angry at getting a lot of help when my family really does not need a lot of help.
We are able to contribute tax free a significant chunk of his day care costs. In 2016, we are doing well for ourselves so our marginal income is taxed at a fairly high marginal rate. I’m okay with paying a high marginal rate as I like civilization and the public sphere. I thought back to 2009 and 2010. Those years were lean. I was either out of work or consulting and my wife was working but unable to find full time work. We were tight and paying the mortgage was an adventure some months. If we were able to afford to put money away, we would have seen a tax benefit that is significantly less than what we are getting now. And those were the years when we really needed help as we had an infant daughter and a fraction of total income in 2016 or projected for 2017.
I’m angry about this because the tax deduction racket shovels most of the benefits towards people who don’t need the additional help. Someone who is in the top bracket this year will see the federal government subsidize their $1,000 contribution with a $400 tax break. Someone who is making $10,000 a year will not be able to afford to make a $1,000 contribution and in the odd case that they could, the federal subsidy administered through the tax code is only worth $100. That is wrong on a moral basis. More help goes to people who really don’t need it as the marginal value of their last dollar is fairly low.
One of the policies I want to see advanced is a flipping of tax deductiblity towards an open ended credit so it is more of a sliding scale based on either income or contribution. Here is how I think it could work:
The first $200 of a contribution to an HSA or an FSA would have credit equal to the size of the contribution times the top income tax marginal rate.
The next $500 contributed would have a credit equal to the size of the contribution times the second highest income tax marginal rate
The next $500 would have a credit equal to the increment times the third highest marginal rate
This would continue until a threshold is reached where any contributions to a tax advantaged account receive a federal subsidy equal to the lowest marginal rate. It still encourages savings but it gives more help to people who need it and less help the the people who are in pretty good to really good shape.
Raoul
Not to put to fine a point on things, but I was just looking at my 2015 tax returns to plan my year-end giving. My combined Fed + State effective tax rate was about 19%. So if I put $5K in an HSA, I’d save $950 a year in taxes (and that assumes that the low rate I pay on investments doesn’t go even further down under a unified GOP pipe dream tax-starvation diet!). $950 isn’t gonna matter very much to my total health care spending (self-employed, current premium is around $650/mo — and I’m forced into a shittier plan for 2017 since the Blues basically abandoned MN for next year).
What I do care about much more? Being able to buy a policy at all. I’m in my 50s, have several (easily managed but annoying) pre-existing conditions, and a history of serious and expensive medical conditions in my family tree. If the protections of ACA get weakened or removed in this new land of policy crapitude, I’m probably screwed unless my partner can get me on his policy, and he keeps working another 14 years (he’d like to retire in 10).
I read somewhere that the GOP is considering the shitty “continuous coverage” thing as a pre-existing bridging mechanism, if so, then I can probably get by. But it will be a huge anxiety increase, and I remember when I was young and foolish and had a coverage lapse and ended up going bare for over two years until I got a job with ins again, as I was in the discontinuous cover gap and the broker I worked with said “you don’t want to apply right now, if you do you’ll probably get a denial and you’ll be even more uninsurable.”
The old system was terrible. People forget very quickly how bad it was, and I’m not even talking about the medical bankruptcies factor.
EBT
Is there some legitimate policy reason to not roll over the balance of an HSA? Like to keep people from using it as a retirement account? Because from my point of view it really just makes the whole thing smell of scheme.
Auntie Anne
I agree with you, Richard – the tax benefits of an HSA accrue to those who do not need them and can afford to make contributions. Interestingly enough, there’s a big push by the HSA vendors right now to position the accounts as savings vehicles for retirement medical expenses, rather than as a vehicle to fund immediate medical expenses. Could it be that they are seeing that more highly compensated folks are the primary users of these accounts?
Richard Mayhew
@Auntie Anne: Oh definitely, they are being marketed/pushed to affluent individuals as another way to save tax free for retirement. Most of the tax benefits and balances in the HSAs go to people who are making good money and have large assets already.
gene108
@Auntie Anne:
HSA’s, as far as I know, have always been partly sold as a retirement savings vehicle. If you can put enough away each year, i.e. your plan has a low enough deductible and you have enough income to save beyond what the deductible would set you back in a year or you are very healthy, it basically turns into a managed investment account for you, which you can access at 65.
@Raoul:
Too many people, in the old system, had good enough employer coverage that they did not feel the downside risk of not having insurance. They were very aware of what would happen, if they ended up on a job without benefits, but they figured it would never happen to them.
It was a shitty system, but enough Rush Limbaugh and his types kept saying it was the “best healthcare system in the world”, in the run up to the PPACA being passed, that enough folks have that idea lodged in their head.
“Best healthcare system in the world” and the PPACA destroyed it. Let’s go back!!!
Auntie Anne
@gene108, I agree that they’ve always been partly sold as a retirement savings vehicle, but I’m now seeing webinars and marketing materials that focus on their main benefit being a retirement savings vehicle, and it’s coupled with the new “in-thing-in-benefits” emphasis on financial wellness. I will tell you that the highly compensated employees base their plan choice, in part, on how they can derive the most tax savings (we offer both traditional and HDHP plans).
Tom Levenson
See, for the next several years the twin themes: Privatize risk. Create ways to allow the well-off to wealthiest to cut their share of that increasingly private risk through tax subsidies.
It’s the GOP way.
Feathers
My RWNJ sister-in-law absolutely freaked when the amount that could be put into an FSA account was cut, as part of the ACA. She took it incredibly personally. “They” were punishing her for having a good job, being thrifty, and taking good care of her kids. She was also livid that her mom was referring to her and my brother as being in the “1%”. They would be back in the (dairy) cow town she came from, but they are easily in the top 10%, with just “normal” good jobs in the DC area.
A very large part of the problem is people who are just doing “normally,” don’t realize how far up the food chain they really are.
Raven Onthill
@Richard Mayhew: Of course, if the securities markets collapse again the HSA-as-investment is suddenly worth much less.
How much of this is designed as another way to loot the savings of the upper middle class? Now that they’ve looted the equity in people’s homes, and with Mnuchin as Treasury Secretary homes are going to continue to be unsafe investments, are they turning to retirement accounts?
Another Scott
@EBT: I thought HSAs had to be spent every year as well, but that’s apparently not the case. Balances can roll over.
Yes, it does indeed seem even more like a tax avoidance scheme for the wealthy than something that makes (some, limited) sense for paying medical expenses. Just like Rmoney’s supposed $100M IRA.
:-/
Cheers,
Scott.
Raven Onthill
It looks very much like it is being made impossible for people not already rich to save.
Downpuppy
@Raoul: If your effective rate is 19%, your marginal is probably about 30, and you’d save $1500.
There are a slew of tax benefits with income cutoffs, mostly in the $100,000 to $200,000 range. Education deductions, Roth IRAs (although that one is meaningless now thanks to conversion rules), various credits, active rental loss, usw.
One of them is the child tax credit, which is refundable, income limited, and quite well designed.
Soprano2
You find this in other areas, too, like banking – the people who absolutely don’t need breaks get all kinds of them, while the marginal people who could really use a little bit of help are instead subjected to $35 fees for going $5 over their checking account balance. I was surprised to find out how many services I could access at my bank once I had an account with a substantial amount of money there. I didn’t even know there was a such thing as a personal banker!
I keep telling people that the system we had before the ACA was worse, but many of them don’t seem to remember that at all unless they were subjected to it in some terrible way, like being denied coverage for a pre-existing condition. People’s memories are extremely short.
LongHairedWeirdo
One point of note: the two high deductible plans I’ve seen had maximum out of pocket expenses *below* the maximum HSA contribution. So it was expected that you’d bank a bit of money, year over year, and be able to put it into investments.
It’s not just tax advantaged spending – it’s additional investment income.
Central Planning
@Another Scott: I think you’re thinking of Flexible Spending Accounts which have to be used every year, vs the Healthcare Spending Accounts which roll over.
Another Scott
@Central Planning: Ah, could be.
FSAs at Healthcare.gov.
And it looks like there are a variety of types of FSAs, of course. :-/
(sigh)
It’s “funny”, isn’t it, that the people who scream about the complexity of the tax code and how we need to make everything simpler are the same people who come up with these tax schemes that have all kinds of limitations and exclusions and special provisions and (generally) aren’t available to people who take the standard deduction (most taxpayers).
Thanks.
Cheers,
Scott.