President elect Donald Trump has stated his intention to repeal the Affordable Care Act and replace it with a free market system and one of the tenets of his plan could involve expanding the use of Health Savings Accounts (HSAs). These accounts allow taxpayers to make tax-deductible contributions that they can use to pay for healthcare costs. The money in the account grows tax free as long as withdrawals are used to pay for qualified medical expenses and account owners can begin drawing income from them at age 65. These accounts are usually paired with a high-deductible health insurance policy that provides the insured with fairly comprehensive protection.

Possible Changes

Trump and the Republicans want to make two major changes to HSAs that will make them more accessible to Americans. Trump would like to make them easier to pass on to heirs, and other Republicans want to increase their contribution limits to almost double their current level. Savers currently hold about $35 billion in 18 million of these accounts. The current deductible levels for these accounts are at least $1,300 for singles and $2,600 for families. The maximum possible out-of-pocket costs for these plans is $6,550 for singles and $13,100 for families. Single account owners can contribute up to $3,400 in 2017 and families can contribute up to $6,750. Account holders who are at least 55 years old can contribute an additional $1,000. (For more, see: Pros and Cons of a Health Savings Account.)

Trump would like to make Health Savings Accounts more portable by exempting them from the beneficiary’s income upon inheritance. Under current law, an HSA that is inherited from a spouse is tax free, but will be counted as taxable income if the beneficiary is someone other than a spouse. House speaker Paul Ryan and other Republicans also want to raise the contribution limits to match the maximum out-of-pocket expenses limits. If this happens next year, then the contribution limits would rise to $6,550 for singles and $13,100 for families. They also want to allow spouses to make catch-up contributions to these accounts, and instill a provision that allows account holders to pay for qualified medical expenses that are incurred before the HSA has been set up to be reimbursed by an HSA, provided that the account holder establishes the account within 60 days.

Another way Trump and the Republicans could also spur investors to open HSAs would be from a repeal of the Cadillac Tax, one of the key provisions in the Affordable Care Act. This provision will levy a 40% excise tax on all high-cost health plans and is scheduled to go into effect in 2020. But Congress has been divided on this tax and voted last year to put the tax off for two more years.

Michael Trilli, a senior consultant at financial services consulting firm Aite Group, told CNBC that, "The employer Cadillac tax could be abolished immediately and will propel HSAs. HSAs can be a bipartisan force that drives better outcomes for all." He went on to say that while HSAs have become popular benefits for employers, they are far less used by those who are not offered this account by their employers. He envisions that one possible solution to this dilemma would be government subsidies similar to the ones that employers provide, which could encourage people to open and use these accounts and start funding them with their own money. (For more, see: Rules for Having a Health Savings Account (HSA.)

The use of HSAs is likely to substantially increase in the near future. "Nearly half of employers may offer a high-deductible health plan within two years," William Ziebell, executive vice president at insurance brokerage Arthur J. Gallagher & Co., told CNBC. He bases his prediction on a Gallager survey of over 3,000 employers that was conducted in March. The survey revealed that about a third of employers currently offer an HSA-compatible plan to their employees. Another 15% said that they will most likely adopt these plans by 2018.

HSAs offer an advantage over Flexible Spending Accounts (FSAs) because there is no use-it-or-lose-it limitation. Fidelity Investments recently released an analysis of its 500,000 HSAs, saying that over 75% of HSA owners actually withdrew less than they contributed last year and a quarter of account holders made no withdrawals at all.

Many employers encourage their employees to use their preferred HSA provider, but employees who have qualifying high-deductible health insurance are free to choose any provider they want. However, many employers will only make matching HSA contributions if the employee chooses the preferred provider. HSAs are portable and can be moved from one provider to another. Fees and investment options are key considerations for these accounts just as with retirement accounts.

The Bottom Line

Health Savings Accounts may quickly become the vehicle of choice for health insurance for many Americans because of their tax advantages and versatility. Trump and the Republicans will try to get measures passed that will make them even more attractive. (For more, see: How to Use Your HSA for Retirement.)

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