If HSAs Are So Great, Should Every American Be Eligible to Open One?

Many Americans aren't eligible to open and fund a Health Savings Account. Should that change?

Health Savings Accounts allow most Americans - from the unemployed to laborers to executives - who meet eligibility requirements the opportunity to build a medical emergency account with tax benefits. But not all Americans qualify to open and fund these accounts.

That's too bad. Some are shut out because their employer doesn't offer an HSA-qualified medical plan. Others are temporarily or permanently disqualified from opening or funding a Health Savings Account because they don't meet all eligibility requirements. Still others just don't understand the benefits and miss out on this financial opportunity (and many others, like capturing employer matches to their workplace retirement accounts) and many others.

Helping the last group is a long-term education project. But increasing the pool of people who are HSA-eligible should be a top priority of anyone who wants to help people manage the cost of medical care. Here are some approaches that will allow more Americans to open and fund a Health Savings Account:

Decouple Health Savings Accounts from HSA-qualified Plans

One approach to expanding Health Savings Accounts is to end the requirement that people must be enrolled in an HSA-qualified medical plan and satisfy other requirements to open and fund an account. This tack opens these accounts to everyone, including Americans whose employers don't offer an HSA-qualified plan today (or position that product such that it makes little financial sense for employees to enroll) or who don't meet other eligibility requirements.

This concept needs a little more detail. For example, what does "everyone" mean? Every American citizen? Everyone who lives in the country? Every adult? Every American adult and also children with earned income (like Individual Retirement Arrangements)? Everyone enrolled on any medical plan, including Medicare and Medicaid, as well as health-sharing ministries? What about people who have disqualifying coverage (like being covered by a general Health FSA) under today's rules? Literally everyone?

These decisions are mere details. The important point is that tens of millions of Americans would be able to open these accounts for the first time. This group of newly-eligible people would have the opportunity to build an emergency or retirement medical savings account and enjoy tax benefits that increase the purchasing power of their accounts.

A challenge to this broad an expansion is the cost. Congressional rules require any new spending to be offset by tax increases or reduced spending in other areas. Extending this tax break constitutes what's called a tax expenditure, a concept in which one assumes (or, perhaps, 435 people assume) that Congress has can tax away 100% of economic activity, and anything that it doesn't take is an expenditure.

Another potential issue is the break in the current idea that Health Savings Accounts are a reward for people who accept a higher level of financial responsibility for their medical care. Decoupling the tax benefits from the underlying medical plan would make the tax break just another part of the tax code and thus perhaps an easier target to be tinkered with future rounds of tax legislation.

Define an HSA-qualified Plan More Broadly

A less costly (in terms of tax revenue foregone) approach is to keep the current requirement in force that limits eligibility to individuals who are covered by an HSA-qualified medical plan. The current definition is prescriptive: a minimum deductible, an out-of-pocket maximum, and all services except select preventive care are applied to the deductible. This definition can be expanded in one of several ways:

Actuarial value. Actuarial value refers to the percentage of claims (at a product level, not individual contracts) that the insurer pays. For example, the insurer pays a greater percentage of claims on a plan with no deductible than on a plan with a $6,000 deductible. The mathematical formula (total dollar value of claims divided by the dollar value of claims paid by the insurer) produces a percentage that's used to express actuarial value. For example, if a plan generated $100 million in claims and the insurer pays $70 million (patients pay the other $30 million in the form of deductibles, coinsurance, and copays), the plan has an actuarial value of 70.

Minimum deductible. Another approach would be to declare any plan with deductibles at or above a certain level (say $1,500 for self-only or $3,000 for family coverage) is an HSA-qualified plan, regardless of whether every non-preventive service is applied to the deductible. Thus, a plan could cover primary-care, telemedicine, behavioral-health, or urgent-care visits below the deductible without disqualifying the plan - as this level of coverage would disqualify plans under current law.

These approaches would offer some important advantages, They:

1. simplify the rules.
2. allow insurers and employers to offer high-value services (like those listed above) with smaller (copay) or no financial barriers to encourage utilization.
3. extend eligibility to people who are covered by plans with high deductibles that, due to a design feature, don't meet the current prescriptive definition of an HSA-qualified plan.
4. retain the connection with a medical plan with higher out-of-pocket responsibility.

As an added bonus, lost tax revenue would be lower because enrollment would be limited to people who are enrolled in certain medical coverage.

Eliminate Some Eligibility Barriers

In addition to being enrolled in HSA-qualified coverage, an individual must not have any disqualifying coverage if she wants to open and fund a Health Savings Account. These provisions shut the Health Savings Account door on tens of millions of Americans who are enrolled in Medicare (even if they're working seniors also enrolled on an HSA-qualified employer-sponsored medical plan, employees who participate in a general Health FSA and their families, many military veterans, and many Native Americans.

Congress can expend the number of Americans eligible to make and receive contributions to a Health Savings Account by up to nearly 60 million Americans by redefining Medicare so that it's not disqualifying coverage. Medicare Part A (inpatient services) has a deductible ($1,556 in 2022) that's far higher than the statutory minimum annual deductible of an HSA-qualified plan ($1,400 in 2022, projected to rise to $1,500 in 2023. Both figures are indexed for inflation. Although each uses a slightly different formula to calculate inflation, the Part A deductible will always exceed the minimum deductible for an HSA-qualified plan absent a legislative change.

Similarly, Congress can redefine other disqualifying coverage by passing legislation that opens the door to Health Savings Account to others by:

1. allowing workers to disenroll mid-year from a general Health FSA to become HSA-eligible,
2. permitting veterans and Native Americans to receive all medical care through the Department of Veterans Affairs (VA medical system) or Indian Health Services, and
3. letting veterans who've earned lifetime TRICARE coverage keep that plan.

Taking this approach would be the least costly rout to follow because it would minimize the loss of tax dollars by eliminating the Health Savings Account barriers for the fewest number of people. But this concept extends tax benefits to some important groups of Americans (and voters): older people, military veterans, and Native Americans.

The downside to this approach is that it still leaves millions of Americans without access to the most tax-efficient savings account that the national government offers. It's an improvement over the status quo, but falls short of the other approaches that extend the benefits of a Health Savings Account to many more Americans.

The Bottom Line

Achieving Health Savings Account expansion is difficult. The different proposals are move in the right direction, though end at different destinations. All involve costs to government in the form of lost tax revenue, and the plans that open accounts to more people invariably cost more. And Health Savings Account trustees and administrators haven't coalesced around a single proposal and focused their lobbying efforts on one approach.

In the current Congress, it's difficult to project meaningful movement toward expanding the number of Americans who can open Health Savings Accounts - although appeals to open the door to certain organized groups (like seniors, veterans, and Native Americans) may spur change. But the pendulum swings in control of Congress during this century (the most disruptive 20-yar period in American history) and early projections of the outcome of the 2022 midterm elections suggest that the legislative ground may be far more fertile a year from now. It's time to plant the seeds of Health Savings Account expansion now to reap the harvest a year from today.