HSA hassles feared from tax measure

WASHINGTON—A surprise assault on health savings accounts by Congress' tax-writing committee would significantly increase the cost of HSA administration, resulting in higher fees paid by employers and employees and perhaps a withdrawal of banks from the HSA market, experts say.

Last week, the House Ways and Means Committee approved tax legislation, H.R. 5719, on a 23-17 vote that includes a provision requiring HSA trustees, typically banks, to substantiate that distributions from the accounts are for health care-related expenses.

Unsubstantiated expenses would have to be reported on tax forms and would be automatically subject to income and penalty taxes. HSA distributions now can be taken tax-free if used to pay for health care-related expenses. Distributions taken for other purposes are taxed, with an additional 10% tax imposed.

Substantiating expenses would be costly for trustees. In the current low-overhead HSA administration world, employees with HSAs often pay uncovered health care expenses, such as those falling under a deductible, from their accounts with a bank-issued debit card or bank-issued checks. No substantiation is required that the distributions are, in fact, used for payment of health care expenses.

The low overhead also means modest fees are charged by banks, which consultants say, average about $3 per account per month.

Adding substantiation systems would likely result in a doubling of account fees, said Scott Sims, a legal consultant in the Falls Church, Va., office of Hewitt Associates Inc.

"It would be a significant administrative expense," said Gregg Larson, national HSA product leader with Affiliated Computer Services Inc. in Minneapolis.

That expense and the manpower needed to analyze paper claims and receipts could be more than some banks would be willing to invest in, resulting in the withdrawal of some from the market and giving employees fewer choices in which to open HSA accounts.

"This could kill off a lot of the vendors. They are not making a lot of money on this business to begin with, and claims substantiation isn't the kind of business banks want to be in," said Scott Keyes, a senior health care consultant with Watson Wyatt Worldwide in Stamford, Conn.

Some observers see the proposal as a means by congressional HSA opponents to undermine HSAs.

"You are making the product more expensive and you are talking about fewer" choices for enrollees, said Andy Anderson, of counsel with Morgan, Lewis & Bockius L.L.P. in Chicago.

"It could really be the start of the dismantling of the HSA model," Mr. Anderson said.

The legislation is a change in direction for the Ways and Means Committee. In 2003, panel leaders played a key role in winning congressional authorization of the accounts and they later championed changes in the law to increase the appeal of HSAs.

As recently as 2006, Rep. Bill Thomas, R-Calif., then Ways and Means Committee chairman, introduced and ultimately won passage of legislation that allows employees to contribute more to HSAs than they previously could.

But with the Democrats capturing control of the House in the 2006 elections, HSA critics, including Reps. Charles Rangel, D-N.Y., and Pete Stark, D-Calif., assumed the committee's top leadership positions. Rep. Rangel is the committee chairman and Rep. Stark— who once described legislation that increased HSA contribution limits as a "new billion dollar shelter for the wealthy"—chairs the panel's health subcommittee.

On the HSA front, "the political winds are blowing in a different direction on Capitol Hill," Mr. Anderson said.

On the one hand, HSAs still enjoy widespread support on Capitol Hill, so it isn't known whether the proposal will win final congressional approval. The full House could vote on the bill as early as this week.

On the other hand, the provision raises money, said Frank McArdle, a Hewitt Associates consultant in Washington. If the provision is stripped from the broader bill, that money would have to be found elsewhere.

According to a Joint Committee on Taxation analysis, the HSA substantiation provision would raise $308 million in tax revenues by 2018. The provision would go into effect in 2010.

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