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]