What's Does It Mean to 'Decouple' HSAs?

What would happen if eligibility to fund a Health Savings Accounts weren't directly connected to a specific underlying medical plan design?

Among people who seek to expand the Health Savings Account opportunity to more Americans, the concept of decoupling is a compelling and straightforward approach. But what is decoupling? Who would benefit if decoupling were accomplished? And what are the barriers?

Let's explore this topic in depth.

Current Eligibility Rules

Under current federal tax law, individuals must meet three eligibility requirements to open and fund a Health Savings Account:

1. Enroll in coverage that's deemed a High-Deductible Health Plan.

2. Not be covered by a plan that's not HSA-qualified.

3. Not qualify as another taxpayer's (usually a parent's) tax dependent.

An HSA-qualified medical plan (Requirement No. 1 above) has a minimum deductible of $1,500 (self-only plan) or $3,000 (family coverage). (Note: T Hese figures increase to $1,600 and $3,200 in 2024 due to annual indexing for inflation.) All services except select preventive care and other services recognized by the federal tax code (for example, virtual physician visits on all plans that renew through Dec. 31, 2024) must be applied to the deductible.

Example: Grasiele's medical plan has a deductible of $3,500 for self-only coverage. It encourages prompt diagnosis and treatment of simple conditions by covering physician visits in full after a $35 copay and offers generic drugs at no out-of-pocket cost. This plan is not HSA-qualified because it covers these services before Grasiele satisfies the deductible.

This example is important because of the confusion around the term High-Deductible Health Plan. Grasiele's plan certainly has a high deductible. But it doesn't meet the statutory definition of an HSA-qualified plan. Thus, even though she faces very high out-of-pocket costs, Grasiele can't open and fund a Health Savings Account to reimburse tax-free her qualified medical expenses.

Decoupling Defined

Decoupling is a simple concept. It removes the requirement that Health Savings Account owners must be covered by an HSA-qualified plan to fund their accounts.

The range of the decoupling varies from proposal to proposal. All initiatives include anyone covered by a private medical plan that meets federal requirements under the Affordable Care Act. Other proposals are more inclusive, extending the Health Savings Account option to Americans who are enrolled in Medicare or Medicaid.

There were almost 37 million Health Savings Accounts as of January 2023, a number that undoubtedly has grown with an additional eight months of enrollment. Some people own more than one account, but it's probably reasonable to assume that there are some 30 million or more unique owners. That number could grow by a factor of four or five if adults (those who don't qualify as someone else's tax dependent) enrolled in employer-sponsored coverage, nongroup plans, and Medicare were suddenly eligible to open and fund a Health Savings Account.

Benefits of Decoupling

Decoupling offers some important advantages:

Lower the net out-of-pocket cost of care. Most people covered by small groups and in the nongroup market face deductibles of $2,000 for self-only and $4,000 for family coverage. Yet in most cases, these plans aren't HSA-qualified. Allowing enrolled adults to open and fund a Health Savings Account would reduce their net cost of care by reimbursing their qualified medical expenses tax-free. This benefit is particularly powerful for families dealing with a chronic condition or an acute injury or illness.

Reduce the effect of medical expenses on personal bankruptcy. Headlines tying personal bankruptcy to unpaid medical bills are misleading (in many surveys, someone who loses $60,000 of income and incurs $4,000 of medical cost-sharing is defined as someone whose out-of-pocket medical expenses triggered the bankruptcy filing). Nevertheless, it's certainly true that people who systematically save for an emergency can weather that financial storm more easily.

Help people enrolled in HSA-qualified plans with disqualifying coverage. Today, some people who are covered by HSA-qualified plans can't open and fund a Health Savings Account. Why? They're working seniors who also collect Social Security and therefore must enroll in Medicare Part A. Or they're working seniors at small companies who must enroll in Medicare Part A and Part B to remain on the group plan. Or their spouse participates in an employer's general Health FSA. Or they're military veterans who carry their TRICARE coverage as a back-up plan or received care at a Department of Veterans Affairs (VA) facility. Or they're Native Americans who received care through the Indian Health Services (IHS). These people would enjoy the benefits of Health Savings Accounts in a decoupled world.

Help people with retirement readiness. Many surveys show Americans' lack of retirement savings. One study, by BlackRock, polled more than 2,600 employees through 465 plan sponsors and showed that plan participants' confidence in whether they were on track in their retirement savings dipped from 68% in 2021 to 56% in 2023. Surveys show different average retirement balances by age, with differences driven by the population polled, but all how that most Americans haven't saved enough to fund the lifestyle that they hope to enjoy in retirement. Health Savings Account are the only account that Americans can open that has no tax friction on contributions, growth, or distributions. Opening this opportunity to save for retirement medical expenses (including Medicare premiums and Medicare cost-sharing) would help more people enjoy a more fulfilling retirement.

Reduce state-government threats to HSA-qualified plans. At both the state and federal level, legislators and regulators impose mandates that may inadvertently affect whether a plan remains HSA-qualified. Examples include full coverage for treatment of breast cancer and termination of pregnancy. Reimbursing these non-preventive services below the deductible disqualifies anyone - whether that person receives the service or not - from opening and funding a Health Savings Account. This is an ongoing threat to Health Savings Accounts from 51+ jurisdictions and more than 500 bills filed biennially.

Challenges of Decoupling

A high barrier that proponents of decoupling must hurdle is the concept of scoring. Most bills proposed in Congress must be evaluated by one of two federal agencies to determine the effect (spending and/or revenues) that it will have on the federal treasury. If Health Savings Account eligibility increases by a factor of five or six or eight, and the agencies continue to make unrealistic assumptions about contribution levels, the cost of a decoupling bill would become prohibitive. Proponents would have to identify spending cuts elsewhere in the federal budget or propose new revenue streams to offset the effect of lost revenues on pre-tax contributions to and tax-free distributions from a Health Savings Account.

Another concern is that if the tax benefit (the Health Savings Account) were no longer tied to a medical plan, it would become just another tax deduction, like the home-mortgage, business-expense, charitable-contribution, or state-and-local-taxes deduction. That status might invite tinkering (for example, eliminating the tax deduction on contributions, thus mirroring Roth retirement accounts) from ambitious members of Congress looking to fund their priorities.

The Bottom Line

Health Savings Accounts help Americans pay their qualified medical expenses by reducing the net cost of that care. Yet too many people, many covered by plans with high patient out-of-pocket financial responsibility, aren't eligible to open and fund an account. Congress should take a serious look at making Health Savings Accounts more widely available to help all Americans pay their current and future qualified medical expenses.

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The content of this column is informational only. It is not intended, nor should the reader construe the content, as legal advice. Please consult your personal legal, tax, or financial counsel for information about how this information applies to you or your entity.