Patient Fairness Act of 2020
by William G. (Bill) Stuart, director of strategy and compliance at Benefits Strategies, LLC
As congressional Democrats rally around healthcare reform that creates a larger role for the federal government in the design, delivery, and financing of medical care in the United States, Republicans, including President Trump and a handful of members of Congress, are focused on more market-oriented solutions to managing costs by giving individuals more information and control over their own care.
US Rep. Warren Davidson (R-OH) recently introduced a bill, the Patient Fairness Act of 2020, that would expand Health Savings Accounts to most American adults and create more transparency in pricing medical services. The bill doesn’t break a lot of new ground (although its expansion of account inheritability is a welcome addition to the conversation), but the bill prioritizes a handful of reforms that create a more level playing field for all purchasers of medical coverage and consumers of medical care.
Here are the key provisions of the Patient Fairness Act of 2020 that relate to Health Savings Accounts:
Decouple Health Savings Accounts from medical coverage. Under current law, individuals can’t open or make or receive contributions to a Health Savings Account unless they’re enrolled in an HSA-qualified plan and don’t have any disqualifying coverage. HR 5566 would allow all American who don’t qualify as someone else’s tax dependent, regardless of coverage, to open an account and make or receive contributions. They would no longer have to be enrolled on an HSA-qualified plan and could have disqualifying coverage (like Medicare, Medicaid, or their own of a spouse’s Health FSA).
The upside is that tens of millions of hard-working Americans would be able to reduce the effect of out-of-pocket medical costs on their family budget by paying these expenses with pre-tax funds through a Health Savings Account. In effect, they would receive a discount of 20% to 35% on all medical, dental, vision services, as well as certain other expenses.
The downside is that as the tax benefit is separated from the coverage requirement, Health Savings Accounts would become merely another tax break, rather than a benefit earned by enrolling in a medical plan with a broad up-front deducible. That change may make Health Savings Accounts a target for lawmakers in the future as they tinker with the tax code to pay for new budget initiatives.
Use account balances to purchase insurance. Under current law, account balances can be used to pay premiums for medical insurance when the account owner is collecting unemployment benefits or continuing coverage under COBRA, plus Medicare premiums and a portion of long-term care insurance premiums. HR 5566 would permit account owners to purchase other forms of medical coverage, including nongroup plans, with tax-free distributions from their Health Savings Accounts.
This change would allow more people without access to employer-sponsored coverage – like freelancers and participants in the gig economy, as well as early retirees – to purchase nongroup coverage at a lower net cost. It would reduce or eliminate the difference in tax advantages between employer-sponsored coverage (employer contributions to premiums are tax-free and companies usually create a Cafeteria Plan so that employees can pay their portion with pre-tax dollars) and nongroup coverage (limited tax deductibility at best).
Increase contribution limits. The 2020 contribution limit is $3,550 for self-only and $7,100 for family coverage. Under HR 5566, these limits would increase to $8,000 for taxpayers who file an individual tax return and $16,000 for those who file jointly with a spouse. In addition, account owners could contribute an additional $3,000 (individual filer) or $6,000 (joint filer) per tax dependent. Current law doesn’t include provisions for additional contributions based on family size. Premiums for nongroup coverage are based on family size and the ages of each covered family member, so additional contributions for dependents would cover these increased costs.
These figures would be indexed for inflation, as they are today.
The catch-up contribution for those account owners age 55 and older, which is currently $1,000 annually and not indexed, would increase to $3,000 (or $6,000 when both spouses are age 55 or older and file a joint tax return). The bill wouldn’t index these figures to reflect future inflation, so the purchasing power of a catch-up contribution would erode over time, as does today’s $1,000 catch-up contribution.
No pro-rating contributions. Under current law, account owners who become HSA-eligible mid-year can either pro-rate their contributions based on the number of months that they’re eligible, or make a full contribution subject to remaining HSA-eligible through the end of the following calendar year. And those who lose eligibility during the year must pro-rate their contributions. HR 5566 would eliminate eligibility requirements (other than not being someone’s tax dependent), so those rules would no longer apply. Health Savings Account owners could contribute to the annual ceiling, regardless of their medical coverage.
Over-the Counter drugs and medicine without a prescription. Under a provision of the Affordable Care Act that became effective in 2012, Health Savings Account owners can make tax-free withdrawals for over-the-counter drugs and medicine only with a valid prescription (which they don’t need to produce to purchase the item, but must retain it in case of a personal income tax return audit). HR 5566 would return to the law before 2012 and allow account owners to reimburse these items without a prescription – just as owners can reimburse over-the-counter equipment and supplies tax-free today without a prescription.
Inheritance. Health Savings Accounts are trusts, and owners name a beneficiary prior to their death. If the beneficiary is a spouse, the spouse receives the balance and can roll it into a Health Savings Account in her name and enjoy the same tax advantages as her late husband did. If the beneficiary is anyone but a spouse, the account is liquidated, and the proceeds are distributed to the beneficiary. The distribution is included in the beneficiary’s taxable income.
HR 5566 would expand the spousal treatment under current law to all relatives (though it doesn’t provide information on how liberal the term relative is for purposes of this provision), as long as the relative deposited the funds in her own Health Savings Account within 60 days of receipt. Thus, an account owner could pass along his account balance and the tax benefits of a Health Savings Account to a child, grandchild, sibling, or elderly parent. This proposed flexibility would allow families to accumulate greater account balances to reimburse multiple generations’ qualified expenses tax-free.
Prospects
This bill is unlikely to become law in its present form. Davidson represents the minority party in Congress. He’s not a member of the House Ways and Means Committee, to which the bill has been assigned for debate. And this Congress, especially in a presidential election year and with an impeachment trial expected to consume several weeks of the legislative calendar, is unlikely to approve any healthcare legislation beyond what it must address to extend and fund existing programs.
On the other hand, man of these provisions aren’t new. This bill reinforces key concepts of Health Savings Account expansion efforts. Sometimes, provisions that appear in multiple bills catch the eye of a staff member of a key congressional committee like Ways and Means, and that champion inserts the idea into legislation that Congress must pass.
Congress must pass a healthcare bill this spring to extend some existing federal health programs that are scheduled to expire without action. So, as one of my favorite lobbyists is fond of saying, a train will leave the station. The question will be how powerful the engine is and how many cars it can carry. Perhaps we’ll see part of HR 5566 become law on one of those train cars.
William G. (Bill) Stuart is director of strategy and compliance at Benefits Strategies, LLC, an independent administrator of tax-advantaged accounts and programs, including Health Savings Accounts. He’s a member of the American Bankers Association Health Savings Account Council.