President’s 2007 Budget Proposes HSA Expansion, Retirement Arrangement Overhaul

February 7, 2006 – President Bush’s 2007 fiscal year budget proposal repeats earlier calls for consolidation of retirement savings arrangements and creation of after-tax personal savings/spending accounts. The budget proposal also includes substantial new incentives for establishing health savings accounts (HSAs). 

The budget proposal issued this week would consolidate such deferral-type plans as IRC Sec. 401(k), 403(b), governmental 457(b), salary deferral simplified employee pension (SAR-SEP) plans, and federal thrift savings plans into employer Retirement Savings Accounts (RSAs).  IRAs would be consolidated into after-tax individual RSAs, and after-tax Lifetime Savings Accounts (LSAs) would be available for saving for other purposes. These proposed accounts are a revisitation of fiscal year 2004, 2005, and 2006 budget proposals. 

The President also proposes permanency for previous tax cut legislation, including the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).  While EGTRRA contained many retirement arrangement enhancements, including increased contribution levels and asset portability, some provisions would become moot if the President’s above-described savings proposals were to be enacted. 

In keeping with prior administration support for HSAs, the President is also proposing new incentives for establishing HSAs. The tax revenue cost of the proposed HSA changes has been estimated at approximately $59 billion over five years and $156 billion over 10 years. 

Included in the budget proposal are

  • a personal tax deduction for HSA-qualifying high-deductible health insurance plan premiums as an incentive for individuals to purchase their own insurance,
  • maximum HSA contributions could equal a qualifying high-deductible health policy’s out-of-pocket expense limit, rather than the present deductible limit (e.g., under present law, the 2006 minimum family deductible limit—and thus the contribution limit—could be as low as $2,100, whereas the out-of-pocket maximum is $10,500), and
  • certain taxpayers making after-tax HSA contributions could receive a refundable tax credit. 

Please note that budget proposals are not equivalent to the introduction of legislation. More details on the President’s proposals and potential introduction as legislation will be forthcoming in BISYS’ Latest News as it becomes available.