Want more employees to enroll in a health savings account? Here’s a simple solution

Health savings accounts (HSAs) were established in order to provide a tax-effective means for people in high deductible health plans to make tax deductible contributions to fund medical out-of-pocket (OOP) expenses not covered by insurance. However, many people may not be able eligible to contribute to an HSA due to limitations imposed on HSA eligibility.

According to the Kaiser Family Foundation, 85% of covered workers are subject to a general annual deductible. The general annual deductible has increased 13% over the past five years and 68% over the past 10 years. The changes in the health insurance marketplace in the years since HSAs were established indicate that HSAs would be a helpful way to provide more people with a means to fund these increased deductibles and out-pocket expenses on a tax-favored basis.

It is time for Congress to update the HSA rules to allow more people to establish an HSA to help pay for their deductibles and OOP expenses. A number of bills have been introduced in Congress that chip away at the restrictions on who can contribute to an HSA. Rather than address these problems on a piecemeal basis, Congress should consider a simple solution: allow anyone covered by a health plan that meets the requirements under the Affordable Care Act to contribute to an HSA.

Rules for HSA eligibility

The rules for HSA eligibility are complex. To be eligible to contribute to an HSA, a person must be covered by a qualified high deductible health plan. For 2022, an eligible high deductible health plan cannot have a deductible for $1,400 for self-only coverage and $2,800 for family coverage and out-of-pocket expenses under such coverage cannot exceed $7,050 in 2022 for self-only coverage and $14,100 for family coverage (with amounts higher for 2023). (Kaiser Family Foundation data states that in 2021 the average deductible for health coverage provided by small firms is $2,379 and $1,397 for large firms.)

Preventive care expenses paid below the deductible amounts are permitted, but if any other medical expenses are paid for below the deductible, the person is not eligible to contribute to an HSA. This may occur if a person is eligible to receive free or reduced cost medical benefits from a clinic offered by his or her employer or when a state law requires that certain medical services be covered for free or at a reduced cost.

But that’s not the only requirement. In addition, certain individuals are not eligible for an HSA even is covered by a high deductible health plan. People participating in Medicare, people receiving benefits under Tricare which provides civilian health benefits for U.S Armed Forces military personnel, military retirees, and people receiving benefits from the Indian Health Service are not eligible for an HSA.

Therefore, if a company employs people in these categories, these employees will not be eligible to make or receive contributions to an HSA even if covered by the company’s qualified high deductible health plan, even though other employees in that company may make and receive contributions to their HSA.

Related: IRS releases 2023 HSA, HDHP limits

The COVID-19 pandemic showed just how convoluted these HSA eligibility rules are and demonstrated the need for Congress to enact changes to these rules. During the COVID-19 pandemic, many employer health plans offered telehealth services at no cost or a reduced cost below fair market value since many people could not directly see their physician. However, by providing this ability for employees to use telehealth services during a pandemic, people would become ineligible to contribute to an HSA.

Congress reacted and the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) passed on March 27, 2020, which provided a temporary exclusion for these incentives to use telemedicine to allow participants to continue to make and receive HSA contributions. The relief provided under the CARES Act was available for plan years beginning by or before December 31, 2021. Efforts to extend this relief prior to the end of 2021 were unsuccessful.

Therefore, effective January 1, 2022, HDHPs could not provide telehealth services. However, Congress reconsidered this issue and in the Consolidated Appropriations Act, 2022 the CARES Act relief for telehealth services was reinstated for months beginning after March 31, 2022 and before January 1, 2023. As of January 1, 2023, however, this temporary relief will go away again. This shows that the current HSA eligibility rules are out of step with current health care coverage.

Legislation has been introduced to address some of the HSA eligibility issues. The Stop Penalizing Working Seniors Act, (H.R. 5563) and the Health Savings Act of 2021 (H.R. 6271  and S. 380) would allow Medicare Part A beneficiaries to participate in an HSA. The Health Savings Act also would allow individuals who receive health care from the Indian Health Service to participate in an HSA. The Personalized Care Act of 2021 (H.R. 725) would allow individuals who receive health care from Tricare, which provides civilian health benefits for U.S Armed Forces military personnel, military retirees, and their dependents, to participate in an HSA.

Some interest groups have advocated for legislation that would preempt state law mandates on high deductible health plans or to allow individuals subject to such state law mandates to still be eligible for an HSA regardless of those state law mandates. Each of these pieces of proposed legislation will be helpful to address the inequities under the current HSA eligibility rules.

There is a simpler solution to combat these inequities:  allow anyone who is covered by a health plan that meets the requirements under the Affordable Care Act to contribute to an HSA. Most people with health insurance coverage have high deductibles and out-of-pocket expenses, and they should be able to use an HSA to address medical expenses not covered under their health plan even though they do not meet the current HSA eligibility rules. A broad, simple solution such as this is good health policy which Congress should address.

William Sweetnam is the Technical & Legislative Director for ECFC, a non-profit organization dedicated to maintaining and expanding employee benefit programs on a tax-advantaged basis.