New Legislation Makes HSAs More Attractive

Legislation creating new incentives for Americans to contribute to health savings accounts (HSAs) was signed into law by President Bush on December 20, 2006. The law, the Health Opportunity Patient Empowerment Act of 2006, is part of the Tax Relief and Health Care Act of 2006, which also includes extensions of tax breaks for college tuition, research and development, and energy efficiency investments. Despite these statutory enhancements, the issue of whether Americans will embrace consumer-driven health plans in significant numbers continues to be debated.

Prior to the enactment of the new law, individuals with a high-deductible health plan (HDHP) coupled with an HSA were permitted to make tax-deductible contributions to an HSA equal to the lesser of the amount of the HDHP deductible or an indexed statutory maximum amount, $2,850 for self-only coverage and $5,650 for family coverage for tax year 2007. The new legislation sets the contribution limit at the indexed statutory maximum, regardless of the size of the plan's deductible.

In addition, the new law permits a one-time tax-free transfer of funds held in a flexible spending account (FSA) or health reimbursement arrangement (HRA) to an HSA. Taxpayers are also permitted to make a one-time distribution from an individual retirement account (IRA) to an HSA.

The legislation also repeals the prorated contribution limits that applied to HSAs begun in the middle of a tax year, allowing taxpayers who start accounts during the year to make the full annual contribution.

In addition, the law repeals the requirement that employers make comparable contributions to the HSAs of all employees. Under the new law, employers are allowed to make larger contributions to the HSAs of lower-paid employees than to the accounts of highly compensated employees.

The number of employers offering HSA-eligible HDHPs to employees is likely to increase in 2007, according to a survey conducted by human resources consultancy Watson Wyatt. While few of the companies surveyed indicated they would completely replace their current health care plans with HSA-eligible HDHPs, one-third of the employers said they plan to offer employees the HDHP option.

"The move to consumer-oriented health care programs will continue, and it will evolve to include more than just high-deductible health plans and health savings accounts," said Ted Nussbaum, director of group and health care consulting at Watson Wyatt. "Employers will take these efforts to the next level by targeting strategies at specific segments of health care users and using data on provider quality to help employees effectively control health care costs."

However, a survey on consumerism in health care conducted in September 2006 by the Employee Benefit Research Institute (EBRI) and the Commonwealth Fund found that enrollment in consumer-driven plans remains small, and satisfaction among HDHP participants is lower than among individuals with more comprehensive health insurance.

The second annual survey of a cross-section of Americans with different types of health insurance coverage showed that just 1% of privately insured Americans of working age were enrolled in HSA-qualified HDHPs in September 2006, while another 7% participated in HDHPs but had not signed up for an HSA. Researchers speculated that most enrollees in high-deductible plans do not have an HSA because they cannot afford to make contributions.

Results also revealed, however, that consumer-driven plan participants tend to be more cost conscious in their health care decisions than participants in traditional health plans. The survey showed that HDHP enrollees are significantly more likely than other insured respondents to consider costs when deciding whether to see a doctor or fill a prescription, and to check the price of a service prior to receiving care.

Dallas Salisbury, EBRI president and CEO, said, "It will be interesting to see if continually rising health care costs prompt more workers to conclude that the tradeoff of lower premiums for higher deductibles, and potentially higher out-of-pocket costs, is worth it."

Salisbury added, "Clearly, the choice becomes easier when some of the drawbacks of first-generation consumer-driven plans are removed, such as lack of protection for prevention and chronic care management within the deductible that may cause patients to delay or avoid getting needed care."