A Virtual HSA Discussion

“True, HSA contributions limits by themselves are inadequate to fund a comfortable retirement. But no one seriously suggests using an HSA alone to fund retirement.”

William G. (Bill) Stuart

Director of Strategy and Compliance

June 13, 2019

I’m a big fan of LinkedIn. Used properly, LinkedIn can be a very effective career-building tool. Here are some of the benefits:

  • Companies with specific positions to fill can search profiles to identify candidates who may not be looking for a new opportunity. This functionality disintermediates recruiters in many cases while opening the market to those who aren’t looking to move. Disintermediation disproportionately benefits minorities, women, and younger workers.
  • Professionals can link with specific people and organizations to create a news feed that delivers very targeted information at their fingertips. This news sourcing is often far more effective than scouring through several daily newspapers and industry publications to find a handful of relevant news stories.
  • Industry experts can enhance their visibility and deliver value to their network and others interested in the topic by sharing and writing articles. I certainly take advantage of this aspect of LinkedIn, regularly sharing articles with my commentary, adding my biweekly HSA GPS blog to my feed and publishing my HSA Wednesday Wisdom column every week for nearly a year.

The aspect of LinkedIn that I appreciate most is its role as a forum for intelligent conversation about business issues. In this sense, it’s far different from a site like Facebook, which is appropriate for sharing family milestones and personal experiences, but quickly devolves into name-calling, slurs, and accusations whenever someone posts a slanted political article or offers a strong opinion on a political topic.

LinkedIn, in contrast, is a much more civilized platform on which members are far more likely to post constructive news. Sometimes that news is controversial and generates strong opinions. But those opinions rarely stray from the professional discussion.

I appreciate these discussions because they add value to me as a professional. I want to learn, and understanding other people’s perspectives is a key aspect of learning. Most professionals aren’t exposed regularly to forums where their ideas are challenged. Sure, lawyers, some doctors, and some professors (and yes, salespeople) experience pushback or are exposed to challenges to their assumptions, but most of the rest of us work (and often live) among those whose opinions about the direction of our industries fall within a more narrow range.

And that’s why I valued so much a “conversation” that took place last month when a self-described Medicare guru and national speaker, whose name didn’t register with me, purchased my book, HSAs: The Tax-Perfect Retirement Account, and started an interesting conversation on LinkedIn.

Key elements of the conversation, in which several members of the LinkedIn community participated, are included below with proper dissection:

The title is inappropriate, as no retirement account is perfect for everyone. I wholeheartedly agree that no single account is the best option for everyone. That’s why I used the term tax-perfect, not perfect, in the title. An HSA is the only way to save long-term without any tax friction. Roth 401(k) plans and IRA contributions are post-tax, which means that they’re almost always made with funds that have already been reduced by federal income taxes, state income taxes if applicable, and federal payroll taxes. And traditional 401(k) plans and IRA contributions are free from federal and state (if applicable) income taxes, but federal payroll taxes are always applied to the money when earned.

In contrast, HSA contributions are never subject to income tax (unless you live in California or New Jersey – the two states that don’t allow a state income-tax deduction) or payroll taxes. And distributions for qualified expenses are always tax-free – a distinct advantage over withdrawals from a traditional 401(k) plan or IRA, which are always included in taxable income.

HSAs are great and should be available to everyone. I agree that HSAs are a great way to reduce the effect of higher out-of-pocket medical expenses on typical American families. At the same time, I’m concerned about making them available to everyone.

It’s true that out-of-pocket costs have risen much faster than wages or inflation during the past two decades. For employers who struggle with the cost of providing coverage for employees, the options are limited:

  1. Ask employees to pay more of the premium.
  2. Increase out-of-pocket costs so that those who consume the most care pay disproportionately more of the total cost.
  3. Divert resources from other areas of the company budget – other employee benefits, marketing, real estate – to limit the cost-shifting to employees.
  4. Build an entirely new coverage model using some combination of self-insurance, reference-based pricing, centers of excellence, medical tourism, second opinions, and direct primary care to shift the focus from managing transactions to delivering value.

Most employers focus on a combination of the first three options, resulting in higher and higher out-of-pocket costs. Studies show that most working Americans with commercial coverage now face deductibles higher than the statutory minimum deductible for an HSA-qualified plan ($1,350 for self-only and $2,700 for family coverage in 2019).

Most of those plans aren’t HSA-qualified due to a particular benefit feature (typically covering physician visits or prescription drugs subject to a copay rather than to the deductible). Allowing everyone to open and make or receive contributions to an HSA would help tens of millions of Americans receive roughly a 25% discount on every medical, dental, or vision service that they receive.

This approach has a serious flaw, however. Opening HSAs to everyone – rather than those enrolled in specific coverage – turns HSAs into just another tax break. And when politicians seek additional revenue to offset some of their voracious appetite for spending, they look for parts of the tax code that they can manipulate to turn tax deductions into tax revenue. The 2017 tax bill, for example, capped the deduction for state and local taxes and eliminated some other deductions. Politicians have eyed other major “tax expenditures” (their jargon for provisions in the tax code that deny them revenue that they otherwise would collect) like certain charitable contributions, mortgage interest, and premiums for medical coverage.

If HSAs are offered to everyone without being attached to a certain medical-plan design and other eligibility requirements, HSAs become just another tax break that can be easily eliminated at any time. When HSAs remain part of a broader program that allows individuals who assume a certain level of financial responsibility to pay their out-of-pocket responsibility at a 25% discount, it’s more difficult to lump it in with tax deductions for natural-gas exploration, losses from theft, and moving expenses.

A far better approach is the Actuarial Value (AV) solution. Under this provision, all plans with an AV below a certain figure (I prefer 75%, but a more realistic target is 70%) would automatically become HSA-qualified. This approach recognizes that people with high deductibles, whether or not the plan is HSA-qualified today, need help. And it continues to tie the HSA to a particular plan design so that they’re more than a mere deduction.

Interest rates are low and investment options are limited. Let’s attack these arguments by one. Yes, interest rates are historically low. But the interest rates on Health FSAs is zero, and no one complains when consumers use those accounts to save 25% on qualified expenses. So why criticize HSAs for offering slightly higher interest rates?

Those interest rates are nearly identical to those earned on personal savings and within the cash component of 401(k) plans, IRAs, and other retirement accounts. We don’t hear the low-interest-rate charge hurled at these accounts. So why HSAs?

Yes, investment options are limited – as they are in retirement plans as well. Fact is, some HSA providers – particularly small banks – offer no investment options. These HSA owners should shop for a new or additional HSA so that they can trade more freely. They can find hundreds of HSA providers who offer two dozen or more mutual funds – more than many 401(k) plans – that allow owners to build a diverse and balanced portfolio of investments. And stay tuned as enhancements to our HSA solution, driven by WEX Health, will offer HSA owners the option to invest in stocks.

Contributions are too low to be meaningful. Actually, contribution limits are higher than Health FSA election limits (only $2,700 in 2019, versus $3,500 for self-only coverage in HSA contributions) and are higher for many people than IRA limits ($7,000 family-contract contribution limit to an HSA, versus $6,00 to an IRA).

True, HSA contributions limits by themselves are inadequate to fund a comfortable retirement. But no one seriously suggests using an HSA alone to fund retirement. As a supplement to retirement savings or as a reimbursement account, an HSA provides superior tax savings to a Health FSA, a 401(k) plan, or an IRA.

HSAs would be better if paired with Direct-Primary Care (DPC). I agree.  A DPC program allows a patient to contract with a primary-care doctor to receive all primary care for a single fixed monthly fee. DPC doctors don’t contract with insurers and aren’t part of a provider network that requires referrals to that network. DPC providers can work with patients to refer them to the most appropriate and cost-effective specialty care and diagnostics. They interact with patients in ways that insurers typically don’t reimburse – like Skype, e-mail, and text. They devise wellness strategies with their patients, may provide onsite complementary care (like behavioral-health providers, nutritionists, and social workers) and invest time learning their patients’ treatment preference.

Under current law, patients who enter into a contract with a DPC provider are disqualified from opening and making or receiving contributions to an HSA. And HSA funds can’t be used to pay the monthly access fee. In an ideal world, the law would encourage DPC relationships by redefining them so that they’re not considered coverage (and therefore disqualifying) and are an expense qualified for tax-free distribution from an HSA.

HSAs Didn’t Create the Problem

It’s always important to remember that HSAs aren’t the cause of high medical costs and corresponding high premiums. But HSAs are part of the solution for more than 20 million Americans who have balances in their accounts that they can access tax-free to pay their share of qualified out-of-pocket expenses. HSAs are the heroes, not the villains, in this story.

What We’re Reading

This article reinforces some of the concepts to which I refer above.

Here’s an informative article about how two different people use HSAs – and how employers can make HSAs more attractive.

What’s one issue on which both Democrats and Republicans agree? That prescription drug prices are too high. But can they agree on legislation to address the issue? Learn more here.

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