HSAs may benefit from mandates for companies

But higher withdrawal penalties could make the accounts less attractive

By Darla Mercado March 28, 2010

Employers and individuals may take a closer look at using health savings accounts in conjunction with high-deductible health plans because the health care reform legislation includes mandates that employers with more than 50 workers purchase health care insurance, HSA proponents say.

“Those who will be subject to mandates in the future are looking for ways to control their costs before they get locked into something down the road,” said Roy Ramthum, president of HSA Consulting Services. “Employers are already moving to HSAs.” HSA deposits will top $14 billion this year, up from about $1 billion in 2006, according to estimates from Devenir LLC, a firm that manages HSA investments.

Aside from encouraging the use of HSAs with high-deductible plans, proponents of the accounts predict that health care reform will make HSAs available to individuals who wouldn’t ordinarily buy them. A 2008 study by the Government Accountability Office concluded that HSA participants were mostly high earners. The account holders had an average annual adjusted gross income of $139,000. But health care reform might add to the number of lower-income users.

“The pool of people who are entering the market for health insurance may or may not be your typical HSA customer,” said Eric Remjeske, president of Devenir. “Some will either join out of self-selection or through their employers.”


Still, the reform legislation isn’t all good news for HSAs.

For instance, the new law increases penalties for account withdrawals for non-medical purposes to 20%, from 10%, and it would keep people from using their HSAs to cover over-the-counter drugs unless they have been prescribed.

Those two factors would harm the HSA industry, said Ryan Ellis, tax policy director for Americans for Tax Reform.

“If you’re under age 65 and you buy the proverbial flat-screen TV, then you have to pay taxes plus 20%,” Mr. Ellis said. “I’m not endorsing people using the money for non-medical purposes, but why is the penalty there?”

Prior to the law, the penalties for inappropriate withdrawals from an HSA were comparable to those for early withdrawals from an individual retirement account.

The increase in the penalty may encourage account holders to place their money in different vehicles instead.

“The HSA is less accessible when you put the money in, and for that reason it would be the last thing you would fund,” Mr. Ellis said.

Not so, said Kevin McKechnie, executive director of the American Bankers Association’s HSA Council. “It’s probably an appropriate policy move to make the withdrawal a little harsher so that funds are used for intended purposes,” he said.

Members of the group’s board — which represents 80% of the HSAs administered in the United States — have a very optimistic view of what the new health care reform law would mean for their business. They expect enrollments in HSAs to rise by more than 100% within a year.

“We’re optimistic because we’re the lifeboat for this whole program,” Mr. McKechnie said. “If you’re going to order Americans to buy health insurance, then you have to give them something affordable.”

Mr. McKechnie disagrees with the restrictions on paying for over-the-counter drugs but said that it probably wouldn’t hurt the HSA industry, noting it would be an aggravation for account holders.

“The point of the reform was to give people more access to coverage and make it cheaper and to give people access to the medication they need to be healthy,” he said.

“The prohibition isn’t in the spirit of what this law is supposed to be about. This isn’t the insurance company’s money; it’s your money,” Mr. McKechnie said.

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