BEYOND THE NUMBERS
The House Ways and Means Committee is scheduled to consider several health bills tomorrow, including legislation from Ways and Means member Rep. Erik Paulsen that would expand health savings accounts (HSAs) by allowing high-income taxpayers to shelter much more of their income each year.
Under current law, individuals in a high-deductible health plan (with a deductible of at least $1,300 for individuals and $2,600 for family coverage) that meets other federal requirements may establish an HSA to save money for out-of-pocket health expenses. The accounts offer unprecedented tax-sheltering opportunities for high-income taxpayers: (1) contributions are tax deductible, and participants can contribute up to $3,350 for individual coverage and $6,750 for family coverage in tax year 2016; (2) participants may put their contributions in stocks, bonds, or other investments, with earnings accruing tax free; and (3) withdrawals are tax exempt if used for out-of-pocket medical or long-term care costs.
No other savings vehicle offers all three tax benefits. For example, 401(k) contributions and earnings are tax-free but withdrawals are taxed.
In its chief provision, the Paulsen bill would nearly double the maximum annual HSA contribution starting next year. If it were in effect in tax year 2016, taxpayers could contribute up to $6,550 for individual coverage and up to $13,100 for family coverage.
This expansion would likely benefit high-income taxpayers overwhelmingly. That’s because a tax deduction’s value rises with an individual’s tax bracket, so HSAs provide the largest tax benefits to high-income individuals. In addition, research shows that high-income people are the likeliest to make the maximum annual contributions to HSAs now and would be those most able to take advantage of these higher contribution limits. Moreover, with no income limits on HSA participation, affluent people whose incomes are too high to qualify for individual retirement accounts or who have maxed out their 401(k) contributions can shelter additional funds tax-free in HSAs.