BEYOND THE NUMBERS
My colleague Sarah Lueck wrote today that Senate Health, Education, Labor and Pensions Committee member Bill Cassidy’s new health plan would likely leave millions more people uninsured and underinsured. As I explain below, it also would expand higher-income taxpayers’ ability to shelter their income from taxes.
The Cassidy bill — designed to respond if the Supreme Court, in King v. Burwell, invalidates the subsidies available to federal marketplace enrollees — essentially would convert federal subsidies into deposits into tax-advantaged Health Savings Accounts (HSAs) for residents in states with federal marketplaces. It also would significantly broaden eligibility for the tax breaks that HSAs provide to everyone under 65 with health coverage. HSAs are now available only to those not eligible for Medicare who are enrolled in a high-deductible health plan that meets various federal HSA requirements.
HSAs offer three tax benefits: (1) contributions are tax deductible, with participants able to contribute up to $3,350 for individual coverage and $6,650 for family coverage in 2015; (2) contributions may be placed in stocks, bonds, or other investment vehicles, with the earnings accruing tax free; and (3) withdrawals are tax exempt if they’re used for out-of-pocket medical or long-term care costs.
The accounts thus offer unprecedented tax sheltering opportunities for high-income taxpayers. No other savings vehicle offers all three tax benefits described above; for example, 401(k) contributions and earnings are tax-free but withdrawals are taxed. 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. And since there are no income limits on HSA participation, affluent individuals whose incomes who are too high to qualify for IRA tax breaks, or who have “maxed out” their 401(k) contributions, can use HSAs to shelter additional funds.
Current HSA eligibility and participation are far more limited than Cassidy’s plan would allow. Only up to 27 percent of employers offer HSA-eligible plans and up to 20 percent of workers with employer-sponsored insurance were enrolled in eligible plans in 2014, according to the Kaiser Family Foundation. Actual HSA participation is likely much lower, since not everyone with an eligible plan has an HSA or makes contributions. Under Cassidy’s proposal, any non-Medicare- eligible taxpayer with health coverage could participate. As a result, many more high-income people could use HSAs as tax shelters. That would amount to a substantial, potentially costly new tax cut mainly for higher-income taxpayers.
In contrast, the Cassidy bill would sharply cut assistance to the 6.4 million low- and moderate-income individuals who receive subsidies in federal marketplaces, making health coverage far less affordable for them and leaving many of them uninsured or underinsured.
Finally, the cost of Cassidy’s HSA expansion could swell in coming decades, as people make tax-free withdrawals on income that otherwise would have been taxed.