On May 4, 2017, the House of Representatives passed—by a margin of 217 to 213—the American Health Care Act of 2017 (AHCA). Its purpose is to repeal and replace the Affordable Care Act (ACA), often referred to as Obamacare. This was the second attempt by House Republican leadership to pass repeal-and-replace legislation, the first bill having been abandoned when it became clear that there was not enough support for it to be passed.
Among the many AHCA provisions, some of which would affect taxes, coverage requirements, employer and individual mandates, etc., are provisions that would alter health savings accounts (HSAs). Americans are increasingly using these individual savings accounts, coupled with certain high-deductible health plans (HDHPs), to pay for health care expenses. In fact, the trend in American health care—both employer-sponsored and individually purchased—is toward these “defined contribution” savings arrangements and away from what have been informally referred to as low-deductible/comprehensive health plans.
The AHCA would significantly relax contribution and certain other HSA requirements. Most notably, the AHCA would
- increase annual HSA contribution limits to equal the maximum HDHP out-of-pocket payment amounts (currently $6,550 for single and $13,100 for family coverage);
- treat an HSA as having been established on the date HDHP coverage begins if the HSA is established within 60 days of such date. This change would permit medical expenses incurred on the date insurance coverage begins to be considered qualified expenses;
- restore the 10 percent additional penalty tax on HSA distributions that are not used for qualified medical expenses (the ACA increased the additional penalty tax to 20 percent);
- allow spouses that are both eligible to make catch-up contributions to choose which of their HSAs will receive the additional contributions; and
- allow over-the-counter (i.e., nonprescription) medications to be considered HSA-eligible expenses.
Another health-related, but non-HSA, provision would affect IRAs and employer-sponsored retirement plans. It would restore the 7.5 percent of adjusted gross income (AGI) threshold for the federal medical expense deduction (the ACA increased this threshold to 10 percent). This would, in turn, reduce the threshold from 10 percent to 7.5 percent of AGI for the unreimbursed medical expense exception to the 10 percent early distribution penalty tax.
The AHCA is expected to face challenges in the Senate. The HSA provisions are not considered controversial, but other provisions in the House bill—including those dealing with coverage of pre-existing health conditions, rolling back state expansions of Medicaid, etc.—are expected to be among provisions that many senators, including some in the Republican majority, may not support. If the Senate passes a health care bill different from the House bill, a conference committee process will be needed to reach a single uniform bill, followed by a new vote by both House and Senate, the outcome of which is uncertain at this time.
The HSA and early distribution provisions described above would generally become effective in 2018 if the AHCA were enacted as currently written.
Ascensus will continue to monitor this rapidly developing process and provide additional information as it becomes available.