Healthy, Wealthy May Get Most out of Health-Savings Accounts
    Bloomberg

    Friday 03 March 2006

For some, proposal would create "mother of all tax shelters."

    President Bush's proposal to expand health-savings accounts, intended to help contain spiraling medical costs, may prove a tax-free boon for the nation's rich.

    Both supporters and opponents of the proposal said that the enhanced HSAs offer unprecedented tax advantages and may become more attractive than 401(k)s or individual retirement accounts as a way for the richest and healthiest Americans to build savings.

    The proposal would create "the mother of all tax shelters," said Paul Caron, a professor at the University of Cincinnati College of Law.

    The plan is the centerpiece of Bush's effort to reduce health-care costs and extend coverage. Bush and his allies said that the HSAs will encourage consumers to shop for less-expensive care, fostering competition that will bring prices down. "One way to help control costs is to interject market forces, and one way to do that is through health savings accounts," Bush said Feb. 15 during a visit to Dublin, Ohio, to promote the proposal.

    Bush's 2007 budget proposes allowing Americans who buy high-deductible health insurance to save as much as $10,500 a family to cover medical expenses. The HSAs would be the only investment accounts to combine a tax deduction and a tax credit for deposits, tax-free earnings growth, and untaxed withdrawals for expenses not covered by insurance. Money remaining in the accounts can grow indefinitely.

    "This is the gift that keeps on giving," said Don Alexander, a former commissioner of the Internal Revenue Service, who ran the agency under Presidents Nixon and Ford and is now a partner at Akin, Gump, Strauss, Hauer & Feld in Washington.

    John Goodman, the president of the National Center for Policy Analysis in Dallas and an advocate of HSAs, said that the tax incentives are appropriate because the accounts serve two purposes. "This isn't just a savings account," he said. "It's self-insurance for health care."

    Such proponents as Goodman said that expanded HSAs will allow the equal tax treatment of people who buy their own insurance and those who get insurance benefits from their employer that aren't subject to any tax. Most people who buy their own insurance pay for it with after-tax dollars.

    The proposal favors the wealthy because they are more likely to have the disposable income to contribute the maximum amount. It also favors the healthy because they have fewer out-of-pocket medical expenses that would deplete the account.

    Steven Bankler, a certified public accountant in San Antonio who has provided accounting analysis to congressional committees, said that the only clients he has for HSAs are people who intend to use them to shelter savings from taxes.

    "The wealthier, healthier people think it's very advantageous," Bankler said. "To them, it's a savings account. But for a client with diabetes, his out-of-pocket medical costs are going to be the maximum. There is really no savings."

    The Government Accountability Office, the nonpartisan investigative branch of Congress, said in a January report that the federal program offering HSAs to government workers as an alternative to traditional health-insurance coverage is attracting primarily the healthy and the wealthy.

    Though enrollment in the federal plan has been modest, the GAO said "aspects" of the plans "such as the greater financial exposure coupled with the potential for tax-advantaged savings - uniquely attract higher-income individuals with the means to pay higher deductibles and the desire to accrue tax-free savings."

    The tax proposal, which would cost the government $156 billion in forgone revenue over a 10-year period, is quickly becoming the most hotly debated feature of Bush's health-care agenda. Polls show that health care is the leading concern of voters worried about rising costs and reduced coverage. U.S. spending for health care may double from its present level to $4 trillion by 2015 as the population ages, according to a government study published Feb. 22.

    HSAs have been available since 2004. They currently allow families to save up to $5,450 a year. Contributions are deductible for income-tax purposes, though they are subject to payroll taxes that pay for Social Security and Medicare.

    Bush's proposal aims to almost double the contribution limit, offset payroll-tax liability with a 15.3 percent tax credit, and offer additional breaks for health-insurance premiums. Such premiums can only be deducted now if they exceed 7.5 percent of a taxpayer's income.

    America's Health Insurance Plans, a Washington trade group for the industry, said about 3 million Americans are covered by HSAs, and 37 percent of the policies were bought by individuals who previously had been uninsured. The administration estimates that there will be 14 million accounts by 2010 under current law. If the accounts are expanded under Bush's proposal, the administration estimates 21 million accounts will be opened.