HSAs rising: unintended consequence of the Affordable Care Act.

• Author: Lang, Ron
• Position: Health & insurance

The originators of the Affordable Care Act never intended to encourage the use of Health Savings Accounts. After all, ACA's proponents view HSAs as a tax break for the wealthy. But they are trending upward across the general population with 16 million total accounts in 2015 (22 percent yearly increase) containing more than $30 billion in assets--figures that are expected to double in the next few years.

What is driving HSA adoption?

Answer: Paying for health costs with tax-advantaged dollars.

Health insurance deductibles and out-of-pocket costs have skyrocketed under the ACA, leaving employees to pick up more and more of their health care costs. The politically correct term for this phenomenon is an increase in the "employee cost share," which doesn't make it sound so bad.

Employees picking up a larger cost share results from a trade-off of lower health insurance premiums for higher deductibles and out-of-pocket costs. The tax differences between paying premiums, which are typically paid with tax preferred payroll deductions, and out-of-pocket costs, typically paid with after tax dollars, compounds the financial burden on employees.

There are two ways for employees to pay out-of-pocket costs with before tax dollars: Flexible Spending Accounts and HSAs.

FSAs can be effective, but require the employee to accurately predict their qualifying health care costs for the year ahead. Employee FSA contributions have an insurance risk mechanism requirement, commonly referred to as "use it or lose it." The employee is at risk by losing contributions they do not spend each year; so, FSA under- or over-funding negates some of the advantages. The ACA also cut FSA contribution limits approximately in half and trimmed down the list of items that qualify for reimbursement, making them a bit less attractive than before.

A key HSA advantage is there is no use it or lose it. Contributions stay with the individual, paying out-of-pocket costs through job changes and through retirement. HSAs have a triple tax benefit: A deduction when money is contributed, tax-free investment compounding and tax-free withdrawals. If the HSA withdrawals are not used for qualified health care expenses, they're treated similar to an IRA, so it's common to see them advertised as Health 401(k)s or Health IRAs.

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