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HSA Balances Climb But Benefits Reward Wealthier Consumers Most

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President-elect Donald Trump has proposed expanding health savings accounts as an alternative to the health law. More than 20 million people now have high-deductible health plans that can link to the tax-advantaged accounts, and the average account balance grew by more than a third last year to more than $1,800, according to a new analysis. But consumer advocates warn that health savings accounts would do little to help lower income people who would lose their health insurance if the health law is repealed.

Since their introduction in 2004, health savings account plans have grown steadily. Nineteen percent of workers with employer health insurance are now enrolled in one, according the Kaiser Family Foundation’s annual employer survey. (KHN is an editorially independent program of the foundation.)

Consumers and employers can deposit money in the accounts to pay for medical expenses. The health plans that link to HSAs have to meet federal standards, including having a deductible of at least $1,300 for single coverage and $2,600 for families in 2016 (the amount will remain the same in 2017).

Health savings accounts provide a triple tax advantage that’s not available in other types of savings accounts: Money that’s deposited in the accounts reduces taxable income, earnings in the accounts grow tax free and the money isn’t taxed when it’s used to pay for qualified medical expenses.

At the end of 2015, the average HSA balance was $1,844 — 38 percent higher than the average $1,332 balance at the beginning of the year, according to an analysis of 4 million accounts with $7.4 billion in assets by the Employee Benefit Research Institute. Eighty percent of the accounts with contributions last year also had payouts of an average $1,748.

“When people first have the health savings account, they just see it as a way to pay their medical expenses,” said Paul Fronstin, director of the health research and education program at EBRI, who authored the analysis. “But then at some point they realize they can leave it in because it grows tax free.” If people withdraw their account funds to use for non-medical expenses they’ll be taxed on the income and may be assessed a 20 percent penalty.

But the tax advantages of HSAs skew heavily toward people with higher incomes, say policy experts. People whose income doesn’t meet the income tax filing threshold — about $10,000 for one person or $20,000 for a couple — get no tax benefit at all, and those in lower tax brackets get less benefit from the tax deduction than those in higher income tax brackets. In addition, poorer people are less likely to have cash to spare to invest in the accounts, said Sarah Lueck, a senior policy analyst at the Center on Budget and Policy Priorities.

Trump’s proposal is short on details, but Republicans have proposed a variety of HSA expansions, including raising the maximum contribution limits and expanding what the accounts can be used to pay for.

“If that’s the plan, poor people aren’t going to be helped,” Lueck said.

Fifty-eight percent of tax returns that claimed HSA-deductible contributions in 2013 were from households with incomes of more than $100,000, according to an analysis by the Center on Budget and Policy Priorities of data from the Joint Committee on Taxation. The analysis also found that 70 percent of the total value of HSA contributions that year came from households above that income amount.

HSAs aren’t a good substitute for the premium tax credits and cost-sharing subsidies that people with incomes up to 400 percent of the federal poverty level (about $47,000 for one person) will likely lose if the health law is repealed, Lueck said.

For lower income people, “HSAs are a phantom benefit,” she said.

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