Commentary

Congress Messing with Your HSA

Never mind the presidential race. The battle over who will control your health care is already taking place, under the radar, in Congress.

In April, House Democrats passed legislation that would impose onerous and unnecessary reporting requirements on people with tax-free health savings accounts. As of January, more than 6 million Americans have HSA coverage. That includes nearly 640,000 Californians, or about 3 percent of all Californians under age 65. In some states, HSA plans cover nearly one in 10 people under 65.

Current law requires HSA holders to document their withdrawals in the event of an IRS audit. The new legislation would require every HSA holder to document every HSA withdrawal, every time they file their taxes.

Some politicians just don’t want workers to control their own earnings and have launched an all-out assault on HSAs.”

That’s right: Congressional Democrats have found a way to make Americans’ medical bills and tax returns even more complicated.

Led by Health Subcommittee Chairman Pete Stark, D-Fremont, supporters claim the legislation seeks only to prevent people from claiming a tax break for nonqualified expenses. Stark cites reports that “HSA funds appear to have been spent on escort services, at casinos and bowling facilities.”

Yet Congress’ own Government Accountability Office found that 90 percent of HSA withdrawals are applied directly to qualified medical expenses. Even if the remaining 10 percent were spent at brothels and bowling alleys, federal law does not require funds contributed to an HSA to be used only for medical care. It requires only that withdrawals not exceed qualified medical expenses, or that the account holder pay taxes and a penalty on any excess withdrawals.

In either case, random audits police compliance. More importantly, HSA critics haven’t produced any actual evidence of unlawful withdrawals.

The real reason for the anti-HSA legislation lies elsewhere.

The federal government has traditionally offered workers a large tax break for job-based health benefits. In practice, however, that tax break effectively robs you of control over a large chunk of your earnings: the money your employer puts toward your health insurance. For the average insured family, that’s about $9,000 per year. The law also robs you of control over your coverage decisions.

In 2004, Congress extended that tax break to employee-owned HSAs, enabling workers to reclaim ownership of a portion of those earnings.

If a family obtains a high-deductible health plan, he or his employer can contribute as much as $5,800 to an HSA, tax-free. The family owns the account, which stays with them from job to job. So long as they spend that money on medical care, HSA funds are never taxed. Otherwise, HSA rules are identical to those for traditional IRAs.

Some politicians just don’t want workers to control their own earnings and have launched an all-out assault on HSAs.

Last week, Stark complained, “The total value of all Health Savings Accounts contributions reported to IRS in 2005 was about twice that of withdrawals … suggesting an interest in it more as a shelter than vehicle to obtain needed health care or supplement inadequate coverage.”

Stark is shocked — shocked! — that workers are using their health savings accounts as … a savings vehicle.

Stark further alleges that HSAs “are an effective tax shelter for people whose average incomes are nearly triple that of average tax filers.”

True, HSAs provide a tax break that gets more valuable as earnings rise. (That’s because income tax rates rise with income.) Yet the tax break for employer-controlled coverage provides identical tax breaks to millions more high-income earners. Where is the outrage over that tax loophole?

HSA opponents offer no evidence that unlawful HSA withdrawals are a serious problem, and they can’t say why random audits aren’t enough to deter them. They are highly suspicious when Americans take money out of their HSAs — but equally suspicious when they leave it in. And tax breaks for the wealthy appear to be kosher, unless they let workers control their earnings.

All of which leaves Stark and his fellow travelers open to the charge that what really bothers them is the fact that HSAs let workers control their own money.

Michael F. Cannon is director of health policy studies at the Cato Institute and co-author of Healthy Competition: What’s Holding Back Health Care and How to Free It.