Health Savings Tax Shelter Accounts

Given the economic incentives built into Health Savings Accounts - which were identified when these accounts were first proposed - there are no surprises here: Health savings accounts offer the most benefit to people who don't really need them:

GAO Study Again Confirms Health Savings Accounts benefit Primarily High-Income Individuals, by Edwin Park, CBPP: A new Government Accountability Office (GAO) report indicates that Health Savings Accounts are used disproportionately by affluent households.  Its findings also suggest that HSAs are being used extensively as tax shelters.[1]

What Are Health Savings Accounts and Why Are They Attractive as Tax Shelters? ...Health Savings Accounts (HSAs) are accounts in which individuals with a high-deductible health insurance policy can save money to pay for out-of-pocket health expenses.  In tax year 2008, someone who enrolls in a health plan with a deductible of at least $1,100 for individual coverage and $2,200 for family coverage may establish an HSA.

HSA contributions are tax deductible.  In 2008, individuals may contribute up to $2,900 for individual coverage and $5,800 for family coverage.  These tax-preferred contributions may be placed in stocks, bonds, or other investment vehicles, with the earnings accruing tax free.  Withdrawals also are tax exempt if used for out-of-pocket medical costs.

HSAs thus have a unique tax structure.  No other savings vehicle in the federal tax code offers both tax-deductible contributions and tax-free withdrawals, as HSAs do.  Moreover, because the value of a tax deduction rises with an individual’s tax bracket, HSAs provide the largest tax benefits to high-income individuals.  In addition, higher-income individuals generally can afford to contribute more money into HSAs each year than lower-income people.  And since there are no income limits on HSA participation, very affluent individuals whose incomes who are too high for them to qualify for IRA tax breaks, or who have “maxed out” their 401(k) contributions, can use HSAs to shelter additional funds.

As a result, many health and tax policy analysts have warned that HSAs are likely to be used extensively as tax shelters by high-income individuals.  The Bush Administration and other HSA proponents have repeatedly dismissed this concern and argued that HSAs will not have such effects. ...

The GAO’s new report on the use of Health Savings Accounts examines IRS data for tax year 2005, as well as employer surveys. The findings bolster those from the GAO’s earlier study.[4] The ... principal findings include:

• HSA participants are disproportionately high-income. ...

• Affluent HSA participants contribute much more to the accounts than other participants. ...  The fact that higher-income individuals not only are more likely to have HSAs but also contribute more to their accounts further skews the tax benefits of HSAs to high-income households, as does the fact that the higher one’s tax bracket, the greater the subsidy that HSAs provide.

• Many HSA participants appear to be using their accounts purely or primarily as a tax shelter rather than paying for out-of-pocket health care costs.  The GAO found that a stunning 41 percent of tax filers reporting HSA contributions in 2005 did not withdraw any funds from their accounts at any time during the year.[7]  In recent Congressional testimony, the GAO stated that this was consistent with the view held by industry experts that many HSA users are people who primarily use their HSAs as a tax-advantaged savings vehicle.[8]
  
  Overall, the average HSA contribution in 2005 was $2,100, more than double the average HSA withdrawal of $1,000.  As one would expect, tax filers with incomes over $100,000 had the largest net contributions to their HSA contributions, contributing an average of $2,780 and withdrawing an average of $1,324 in 2005, for a net increase in their HSA balance of $1,456 (see Figure 3).

• Many employers offering high-deductible health insurance plans and HSAs did not contribute to their workers’ HSAs.  The GAO reported that a series of employer surveys conducted in 2005, 2006 and 2007 found that more than one-third of large employers offering HSA-eligible plans made no contribution to their employees’ HSAs.  GAO also cited another survey finding that nearly half of small and large employers offering high-deductible plans made no HSA contributions for their employees in 2007.  This may mean that some lower-income workers who cannot make substantial HSA contributions on their own, and whose employers make no contributions on their behalf, may be unable to afford the high deductibles required under HSA-eligible plans when they or their families need health care.

Health and tax policy analysts have long warned that HSAs could be used extensively as tax shelters by high-income individuals.  The GAO’s latest analysis of HSAs again lends strong credence to these concerns. ...

[GAO Report]

Comments

[Lafayette]

Health Care is deductible in the US? Shouldn't surprise me.

Using fiscal policy to promote Health Care? Dumb, dumber and dumbest. A no brainer.

[Tom Lindmark]

It's late but this one got my blood boiling a little bit. I'll get back to you with my take on this whole article and the supporting article but a couple of quick points.

Did it ever occur to anyone in the analysis of this data to ask the question-why are so many high income earners taking advantage of HSA's? Could it possibly be that a lot of them might be self-employed and find this the most tax advantaged way to provide health insurance for themselves and their families.

How in the world do you or the authors of the supporting document consider a $2100 contribution to a HSA to be abusive from a tax shelter standpoint for someone earning $100,000. The shelter is de minimus.

Like I said I'll be back to you on this one. The inconsistincies and bias are too much to pass up.

I look forward to a good back and forth with you.

[Bruce Wilder]

Mark Thoma: ". . . there are no surprises here . . ."

That could well be the epithet of the Republican policy agenda.

E. Park: "The Bush Administration and other HSA proponents have repeatedly dismissed this concern and argued that HSAs will not have such effects."

Somehow, the Bush people are able to design a program to do what they want it to do: cut taxes on the rich, but still control the debate by denying that the program does what it is clearly designed to do.

How many times have I seen a moderate, liberal or progressive piously and earnestly try to engage the "small government" cover story as if it were a real political philosophical desideratum? How many times have I see acceptance of cynical Republican framing?

[Angelique]

I have to agree with Tom, the bias is so strong it overshadows the few points with merit in this post.

First of all, I find it laughable that I am in this evil high income bracket because my spouse and I make over $100k per year. I live in Orange County, rent a crappy duplex in a mediocre neighborhood and commute to my regular 9 to 5 in an old car. I am well below the median in my area, and am by no means affluent.

I do not have an HSA because I have a low cost HMO. I was spending about $1,000 just on copays when I had a PPO, and I figured an HMO made more sense. After a short stint in the hospital, I now see the value of a PPO. I am now waiting for the enrollment periods to sign up for my HSA and PPO plan together, which is the only way I can afford the quality of care provided by a PPO. I am in the same situation with my dentist and optomotrist: my HMO plan barely covers an annual visit, and gives nothing to "extras" like contact lenses and white fillings.

If we had socialized medicine, we'd all have care as bureaucratic and mediocre as an HMO. The PPO is something else entirely: I do not need permission and an extended waiting period for my husband to see his asthma specialist, I do not need to beg for tests I'm sure I need, I do not need to wait for my prescriptions to be justified by appeal by my doctor before they are paid for. The plan offers the patient control at a significant cost: you pay a high copay for every service you receive, so you have a personal incentive to keep costs down.

I am glad the government is making this level of care more affordable for the middle class. I don't buy into the tax shelter BS--at the beginning of the year you select your deduction, and the more money you have the more flexibility you have to plan for the worst. The truly affluent don't give a damn about tax-free earnings on a few thousand dollars. If you use it for anything other than medical expenses, you pay income tax AND a 10% penalty.

At the very most, a savvy investor could use an HSA to save for Medicare expenses after retirement. You cannot pay a regular insurance premium with your HSA, but they do allow it at retirement or if you are disabled. Given the number of times this is mentioned in government FAQs on HSAs, I am entirely certain it is intended to be used as a healthcare specific savings account. Given the number of people who have arrive at retirement without enough money to cover prescription drugs and still maintain a decent cost of living, I fully support this objective.

[TigerPaw]

Just to put the socialized medicine rant into perspective ...

In BC a single person pays $52/month for coverage (in a lot of provinces you pay *nothing* it's just covered out of general tax revenues). There's never a request for any more money. Doesn't matter what happens, doesn't matter what history you have, doesn't matter what goes wrong - pick any GP in the phone book and go see him. If you've got something serious happening he refers you to a specialist. If you need to go to the hospital for something urgent, you just go or call the ambulance and they'll take you. No copay, no deductible, no whatever the heck else nonsense you deal with. There is ZERO paperwork - just show your card. If there's paperwork to be done the doctor does it and you never see a thing, not a bill, not a statement, not something to sign, nothing. So there zero bureaucracy to deal with.

If you need a prescription you get a slip from the doctor and you go to any pharmacy you want, and you walk out 10 mins later with a bottle of pills. Yes you pay for those, but the provincial government has programs to cover some/all of that for people of limited means. If you're in the hospital and need meds they're free.

Do you have to wait for nose jobs? Sure, non urgent things you wait for. But no one ever got told go home when they were having a heart attack. Are the rooms plush with colour TVs? No, it's a hospital not a hotel. Is the system perfect, no - but there isn't a soul on this side of the border that would trade what we have for what you have.

Anyway, you can go back now to complaining about how evil socialized medicine is.

[Anonymous]

Self employed folks deduct health insurance straight off the top. One of the benefits of 1099, no "account" nonsense whatsoever.

[Lafayette]

TL: Could it possibly be that a lot of them might be self-employed and find this the most tax advantaged way to provide health insurance for themselves and their families.

Hmmmn, I doubt that. That would imply an overly large component of self-employed in the upper-income levels. It's possible, but perhaps most of the wealth in America at that level is coming from corporate stock-option of salaried personnel? (Just a guess.)

Also, I might ask, how many of the middle-class even know this option is possible? How interesting is it to them? It is in this class that we might find a large number of the self-employed tradesmen.

[anne]

"Self employed folks deduct health insurance straight off the top. One of the benefits of 1099, no 'account' nonsense whatsoever."

Right.

[anne]

"If we had socialized medicine, we'd all have care as bureaucratic and mediocre as an HMO."

France, Germany, Japan, etc.... Terrible socialized medicine. OMG!

[macquechoux]

"Health savings accounts offer the most benefit to people who don't really need them:"

No doubt. But you are going to take them away from people like myself and my wife? I have a Health Savings Account and my income is below $100,000. I started off with a Medical Savings Account some years ago. After being a WWWM (Wonderful Widowed White Man) I married a school teacher who had never heard of a HSA. The school board offered a qualifying policy that saved her a bundle and now she has her own HSA, on a salary of $42,000. She saves the difference between her old insurance and the new insurance rate and deposits it into her HSA.

It is amazing how many people have never heard of Health Savings Accounts. After discussing HSAs with friends and acquaintances now several (Mostly Couples) have HSAs.

I believe, note this is just my opinion, that many disapprove of HSAs because they feel if they were more available and promoted that HSA's pose a threat to "universal health care," Medicare and give the individual more control of his health and welfare rather than politicians. I feel it is, "Those who think they know what is best for me." vs. "I can make my own decisions just let me do so," type thing.

There I feel better already.

[anne]

"I believe, note this is just my opinion, that many disapprove of HSAs because they feel if they were more available and promoted that HSA's pose a threat to 'universal health care,' Medicare and give the individual more control of his health and welfare rather than politicians."

I believe, note this is just my opinion, that this comment is nonsense.

[macquechoux]

Anne, just for openers I suggest you read the following and especially your own comments.

http://economistsview.typepad.com/economistsview/2006/01/health_savings_.html

There are tons of articles featuring comments by Ted Kennedy and others on the evils of HSAs than tend to bolster my opinion.

Anyway, you are certainly entitled to your opinion of nonsense. I just hope people like yourself let me keep my HSA.

[reason]

As an outsider a quick comment:
1. Nobody is saying that people who take advantage of HSA's don't get a benefit
2. It isn't a substitute for health insurance, at most a supplement
3. Whether you consider yourself rich or not is irrelevant, you are in a relatively high tax bracket and so get a substantial benefit
4. The opposition to it, is simply because it is a typical republican policy, a give away (tax break) to the already better off that doesn't really solve the problem. Just a waste of scarce budgetary resources.

[Real Person from the Real World]

This is so obvious:
Prof Toma: "Health savings accounts offer the most benefit to people who don't really need them" That it should point something glaringly obvious out: those in power manipulate votes for their own interests. The only real support for these come from the insurance industry and those who can use them to shelter their funds in them. Any limitation on Health resources is artificially created to keep prices high. Now that so many people are collateral damage to the health care system, will anyone challenge the insurance companies, overpaid executives, medical associations, and others who keep the price high? If we get McCain, it will be same 'ol same 'ol. If we get obliary, it looks like we still won't get universal health care.

[Real Person from the Real World]

Dear macquechoux: you sound like a nice guy, and smart, but at your $100k and your wife's $42k, you are hardly poor. A lot of people with two income s together well below $100k, some at $50k for 2 INCOMES, cannot afford the nice deal you get.

[Holly W.]

Angelique: I am in the same situation with my dentist and optometrist: my HMO plan barely covers an annual visit, and gives nothing to "extras" like contact lenses and white fillings. ... If we had socialized medicine, we'd all have care as bureaucratic and mediocre as an HMO.

What's your point here? Many of us already belong to HMOs, so a single-payor system could not be worse than what we've already got.

I have never had medical health insurance that pays for dentist visits at all; dental insurance has always had to be purchased separately. (I just buy dental care on an as-needed basis without insurance.) And while my HMO will pay for an eye exam every two years, I've never seen a health plan willing to pay for contact lenses, either, because they're conveniently labeled "cosmetic," even for people like me who are severaly nearsighted. So if a single-payor healthcare system did pay something toward dental care and contact lenses, it would be an improvement over what many people already get, and if it didn't, it would make no difference to people who already pay out of pocket.

[swells]

Anne, et al, My wife is self-employed. Yes, she gets to deduct here health insurance premiums off the top. That puts her in exactly the same position tax wise as an employee is who has their health insurance paid for by an employer. The employer gets to deduct the amount they spend on health care costs as a business expense.

Is there some reason, a self-employed person should be penalized for being self-empoyed in respect to health insurance coverage? To be honest, I don't know whether an employee's part of the health insurance premium comes off the top before taxes are calculated bt even if that is not the case, there is a substantial discount for being in a group that self-empoyed people often don't get.

So, it seems that being able to deduct health insurance premiums is simply being a little bit fair to self-employed people.

[Holly W.]

The problem with HSAs, as with any kind of benefit tied to tax deductions (IRAs, mortgage interest, etc.), is that they inherently provide a much greater benefit to people in higher tax brackets. If you're in the 35% marginal tax bracket, a deduction is valuable; if you're in the 15% tax bracket, it's not so much help.

This systemic unfairness could be easily fixed if Americans switched our fixation from tax deductions to tax credits. Instead of one person getting a $350 tax deduction for their $1,000 HSA contribution while their co-worker gets a lousy $150 tax break for the same amount of money, it might make more sense for each of them to be able to claim a $200 tax credit instead.

[OhNoNotAgain]

"If we had socialized medicine, we'd all have care as bureaucratic and mediocre as an HMO."

This was already answered a couple of times already, but you really need to do some more research into how universal health care works in many other countries. We're the oddball for *not* having universal health care and instead a large, bloated, and confusing for-profit system, not the other way around.

[richard]

I have an HSA. They offer a max contribution of $2800 for a single person, as opposed to the max contribution of $5000 for a Roth IRA.

Of course they're a tax shelter, folks. 'nuff said.

[me]

"If we had socialized medicine, we'd all have care as bureaucratic and mediocre as an HMO."

I can't really remember the last time I hard my Congressman complian about his crappy, socialized, government health care.

You should chaeck out the wsatisfaction rate of these tax shelters.

[anne]

The problem with Health Savings Accounts is simple; they foster selection of insurance coverage with high deductibles, coverage that would be problematic for a person needing comprehensive coverage. As such, they tend to leave the insurance pool short of relatively healthier people who can reduce the cost of insurance for all or they simply encourage employers to offer high deductible coverage.

The "popularity" of HSAs will make universal health care that much more difficult to gain, and I am not optimistic to begin with.

[john]

I would save your rage for the massive subsidy given to Medicare Advantage plans that is funneling my hard earned tax dollars into HMO executives wallets. And is giving benefits to many senior citizens (so of whom are quite wealthy) far above the amount they contributed over their lifetime in payroll taxes. So before taking away my HSA, to which I contribute my own money after buying my own insurance (I am self-employed) why don't you go after the big fish?

[Ken Houghton]

Mark - Henry Aaron (along with Patrick Healy and Surachai Khitatrakun) pointed this out at a Tax Policy Center Conference on 29 Feb of this year. (Link) And they didn't pretend they were breaking any new grounds.

HSAs are most useful if you aren't silly enough to use them to pay for your health benefits.

[peterbob]

OK. I had a health savings account a few years ago. Since it's high deductible (around $1,200 or so, as I recall), it provides a strong incentive to reduce unnecessary spending. Here is my story:

Went to the doctor and he noticed that my spine was not nicely aligned. He recommended a bone density test. I was a 39 year old male. Normally such a test is for post menopausal women. Because of the high deductible, I would pay 100% of the test up to the first $1,200. I asked how much it would cost. He didn't know. His office didn't know. They apparently weren't equipped to answer the most important question in consumer-driven health care--How much does it cost?

The doctor calls a month later to ask if I've scheduled the test. I told him that I looked it up, and that if I had low bone density, they would recommend impact sports to activate new bone growth and to drink more milk. He agreed, and said that I probably didn't need the test anyway.

I'm sure that saved me a few hundred dollars.

Oh, did I mention that the doctor's practice had just purchased a bone density machine and had the test available in the building? See, the "lab equipment owner" part of the doctor was pushing the test, because he would make profits. Kind of a conflict of interest between that guy and the "physician" part of the guy.

There were things I hated about the HSA, and the fact that you can deduct for non-medical expenses after age 65 and bequeath the amount tax free is a pure give-away and serves no medical purpose, but I do think that we need to think about raising deductibles to lower costs.

[Joy]

My company offered one of these. The chief disadvantage I think it gives to low-income (by which I mean those individuals earning less than the median of, what, $40K a year?) is *unpredictable* health care costs. It lures them in with a low premium. For what? If they stay more or less healthy, fine, they've paid for everything out of pocket and might as well not have paid a premium. If they get sick their unexpected costs could go well into the thousands of dollars and these are not budgets that are handling extra thousands of dollars...in fact, the difference between the lower premium and what these people *were* paying in premiums does not cover the entire deductible especially for a family.

This is what I wrote about it then in a letter I coward-like did not send to the corporate overlords:

I see also that there is a mystery new health plan we are automatically signed up for (unless we change it, and the interface *WARNS* you if you do change it) where we apparently pay a premium for the privilege to pay cash for our own health care until we go nearly bankrupt, at which point 80% of covered expenses will apparently be covered in-network (using a network of doctors none of which I know anything about). Out of network we are still stuck with 40% of the costs. I do note that this plan does cover "preventive drugs" such as birth control pills and weight loss drugs--but not drugs and devices needed to manage chronic conditions such as asthma or diabetes -- drugs which not only save lives, but prevent complications and preserve quality of life. This plan quite possibly combines the worst features of managed health care with the worst features of having no health care at all. It will also not cover my husband (who also has other insurance) as my current plan does. It is also uncertain how much one would need to save to pay for various services with the new plan, even given the estimator (which underestimated customary costs I do know about). I am not impressed. Unless you intend this as a tax shelter for very healthy single people with a lot of disposable income, in which case it is a very good plan indeed.

Please take note of my letter of dissatisfaction. I am sure it is one of many you will receive in the coming months. I will also inform you, I have chosen to retain my current health plan, as it will provide continuity of care and *predictable* costs for which we will be able to budget. My paycheck can handle the increase. My concern remains for employees with little flexibility in their monthly budget who are given large incentives to choose this "plan" and may be stuck with unpredictably high health care costs out of pocket.

[Lafayette]

Tutti Fruti

macque: It is amazing how many people have never heard of Health Savings Accounts.

Nobody would need a Health Savings Account if American Health Care was not a hodge-podge of insurance schemes.

Let's borrow a saying from business and apply it to Health Care: "KISS: Keep It Simple to Sell".

ONE Universal Health Care system for all -- white, widowed, teacher or Tinker Bell.

[anne]

Joy:

"I see also that there is a mystery new health plan we are automatically signed up for (unless we change it, and the interface *WARNS* you if you do change it) where we apparently pay a premium for the privilege to pay cash for our own health care until we go nearly bankrupt, at which point 80% of covered expenses will apparently be covered in-network (using a network of doctors none of which I know anything about). Out of network we are still stuck with 40% of the costs. I do note that this plan does cover "preventive drugs" such as birth control pills and weight loss drugs--but not drugs and devices needed to manage chronic conditions such as asthma or diabetes -- drugs which not only save lives, but prevent complications and preserve quality of life. This plan quite possibly combines the worst features of managed health care with the worst features of having no health care at all. It will also not cover my husband...as my current plan does. It is also uncertain how much one would need to save to pay for various services with the new plan, even given the estimator (which underestimated customary costs I do know about). I am not impressed. Unless you intend this as a tax shelter for very healthy single people with a lot of disposable income, in which case it is a very good plan indeed...."

Nice.

[Worker]

Anne identifies the real threat- a private system that works (FSA's) makes single payer socialism more difficult to acheive.

Who requested this report? Wasn't it Henry Waxman? Isn't his goal is to replace private healthcare system with a single payer system.

This is just propaganda in his political effort.

[Worker]

It is a terrible injustice that my politicians, no doubt bribed by interest groups, mandate in vitro fertilization and chiropractor visits in my base insurance policy, driving the cost to $1000 a month.

HSA's have always been hated by the left because they provide an opt-out to politically motivated mandates.

Maybe the problem with HSA's is that they do not allow a large enough tax-free contribution? Too small a contribution would imply that only "higher income" people with some ability to self-insure found them attractive?