Proposals recently approved by the House Ways and Means Committee would expand the tax subsidies for health savings accounts (HSAs) and allow many more people to enroll in them. HSAs are special savings accounts available to people enrolled in eligible high-deductible health plans (HDHPs), which provide multiple tax advantages. HSAs do little to nothing to make health care affordable for those who need it most and, instead, function as tax shelters that disproportionately benefit higher-income households.
Moreover, some evidence has shown that enrollment in HDHPs—a requirement for HSA participation—is associated with lower use of necessary care and greater out-of-pocket cost burdens. This is especially concerning for lower-income families and some people of color who face greater cost-related access disparities to begin with.
Rather than expanding tax shelters for higher-income Americans, Congress should pursue aggressive reforms to lower health care prices and the cost of prescription drugs.
If enacted, these proposed HSA policy changes would significantly increase costs for the federal government while exacerbating current income and racial inequities and failing to address underlying health care cost and access issues.
What are HSAs and HDHPs?
Health savings accounts (HSAs) are tax-preferenced accounts that individuals can use to save and pay for out-of-pocket health expenses. Only individuals with health coverage through a qualified high-deductible health plan (HDHP) are eligible to contribute to an HSA. These plans have a minimum deductible of $1,500 for individual coverage and $3,000 for family coverage, along with high out-of-pocket limits: $7,500 for individual coverage and $15,000 for family coverage in 2023, indexed for inflation annually. While many states provide similar tax preferences for HSAs some, including California, do not.
In 2023, allowable HSA contributions are capped at $3,850 for individuals and $7,750 for families, based on full-year coverage. For individuals aged 55 and above, the maximum contribution is increased by $1,000. The limits are adjusted annually and will increase to $4,150 and $8,300, respectively, in 2024. Contributions to an HSA can be made directly or through a job-based “cafeteria” plan, an arrangement that allows workers to exclude amounts contributed from their gross income. Contributions can also be made—up to the maximum allowable limit—by an employer, family member, or other individual.
HSA withdrawals are not taxed if they are used for “qualified” medical expenses, which generally include the cost of diagnosing, treating, and preventing physical conditions and illness; transportation to receive care; long-term care services; and both prescription and over-the-counter medications. Withdrawals cannot generally be used to pay for health insurance premiums. However, they can be used for long-term care insurance and limited other coverage, including Medicare Part B for individuals aged 65 and above. Withdrawals can be made at any time. For people under age 65, amounts spent on nonqualified expenses are subject to tax and a penalty. However, individuals above the age of 65 can use amounts saved for nonqualified expenses without a penalty, with such amounts considered taxable income.
This dramatic rise in cost-shifting has come at both the literal and figurative expense of individuals and families. As a result, 29 percent of nonelderly adults with job-based health coverage in 2022 were considered underinsured. While HSAs at least allow for some of these increased out-of-pocket expenses to be paid with pretax dollars, 32 percent of people who did not contribute to their HSAs in 2020 reported not being able to afford to.
Accordingly, studies demonstrate that people enrolled in HDHPs use less care—including appropriate health care services. The affordability challenges associated with HDHPs also widen health inequities, with people with certain chronic conditions, cancer patients, lower-income people, and Black people bearing the brunt of that burden in the form of poorer health outcomes or greater financial strain.
HSAs largely serve as tax shelters for the wealthy
HSAs have veered far from their original goal of helping offset high out-of-pocket medical costs, with a Morningstar investment newsletter describing them as “an unmatched tax shelter” for savings that can ultimately be used during retirement. Individual contributions to an HSA are tax-deductible, and an employer’s contribution is excluded from the contributor’s taxable income. HSA investment earnings are not taxed, and withdrawals that are spent on qualifying purchases are tax-free.
Unlike with a flexible spending account (FSA), any unspent HSA contributions can be rolled over indefinitely. HSA balances can also be used tax-free for health-related purposes during retirement and can be withdrawn penalty-free during retirement as taxable income, similar to withdrawals from tax-deferred retirement accounts. Taken together, these multiple tax breaks are expensive, costing the federal budget $14 billion in estimated lost revenue in the current fiscal year and nearly $180 billion between fiscal years 2023 and 2032. In tax year 2020, just 1.2 percent of tax returns filed included deductions for an HSA.
[HSA] tax breaks are expensive, costing the federal budget $14 billion in estimated lost revenue in the current fiscal year and nearly $180 billion between fiscal years 2023 and 2032.
The tax preferences for HSAs disproportionately benefit the wealthy. Because of their structure, the deductions and exclusions for contributions to an HSA provide greater benefits to those in the highest tax brackets. Each dollar contributed to an HSA by a millionaire is worth 37 cents, for example, while the same dollar contribution is worth only 22 cents for a married couple earning $75,000 per year. Because of this, and the fact that lower-income households are unlikely to have sufficient income to contribute to an HSA, higher-income individuals are more likely to benefit from HSAs. While tax returns for those with incomes of up to $50,000 accounted for 11.7 percent of those claiming HSA deductions in 2023, these individuals received just 4.4 percent of the total benefit of those deductions. By contrast, earners with incomes of more than $500,000 accounted for 5.2 percent of HSA deduction claimers but received 10.4 percent of the total benefits. (see Figure 2)
When higher-income people do contribute to HSAs, they also contribute larger amounts. In 2020, households with incomes of $25,000 to $50,000 contributed an average of $1,611 to HSAs, while those with incomes of $1 million or more contributed an average of $5,955. (see Figure 3)
The upward bias of tax subsidies for HSAs is similar to that for tax-preferenced retirement accounts and, as such, exacerbates well-documented wealth disparities. In fact, data from the Congressional Budget Office show that in 2019, 77 percent of households in the top quintile of the income distribution received a benefit from tax breaks for retirement savings, such as 401(k) plans, compared with just 19 percent of those in the bottom quintile and slightly less than half of those in the middle quintile.
White and Asian households, and men, disproportionately benefit from HSA tax breaks
HSA account holders are not only more likely to be well-off; they are also more likely to be white or Asian than Hispanic or Black. Data from the National Health Interview Survey show that non-Hispanic white adults have consistently enrolled in HDHPs at higher rates than Black or Hispanic adults, and among HDHP enrollees, white adults are also more likely to have an HSA. Furthermore, research by the Employee Benefit Research Institute (EBRI) shows that HSA account holders in disproportionately white or Asian ZIP codes both contribute more to and have higher average balances than account holders in disproportionately Hispanic or Black ZIP codes.
In addition to the stark racial and ethnic disparities described above, men are more likely to benefit from HSA tax breaks than women. An EBRI study based on account-level information for more than 11 million HSAs found that 57 percent of the accounts with a gender indicator were held by men and that male account holders, on average, made larger contributions and had larger account balances than women, which the authors noted may be explained by the fact that “with lower salaries, women may find it relatively more difficult to divert savings to their HSAs.”
House Ways and Means proposals would create even greater inequities and largely benefit the wealthy
Legislation recently passed by the House Ways and Means Committee would expand the tax subsidies for HSAs in several ways that would further benefit higher-income households. The proposed changes include doubling the allowable annual contribution, broadening the range of health plans that qualify people to contribute to an HSA, and allowing account balances to be used for a wider range of health-related purposes.
One of these bills, H.R. 5687—sponsored by Rep. Beth Van Duyne (R-TX)—would increase the 2023 maximum annual contribution from $3,850 to $7,500 for those under the age of 55 with individual coverage and from $7,500 to $15,000 for those with family coverage. That change would enable higher-income households, who are more likely to have sufficient disposable income, to contribute more to an HSA, but it would be of little use to low- and middle-income households, who have insufficient resources to hit the current cap. The proposed change would also be costly, reducing tax revenues by $44.2 billion between 2026 and 2033 according to estimates from the Joint Committee on Taxation.
Conclusion: HSAs are not a solution to high and unaffordable health care costs
HSAs do nothing to address the underlying drivers of health care costs that fuel premium cost growth. Rather than expanding tax shelters for higher-income Americans, Congress should pursue aggressive reforms to lower health care prices and the cost of prescription drugs in order to make it more affordable for employers to offer high-quality, comprehensive insurance products to their employees. The Federal Trade Commission and state attorneys general must also be empowered to engage in stronger regulatory action and oversight to combat anti-competitive market consolidation among health care providers, which is a major contributor to unnecessarily high prices. Finally, Congress and state legislatures should ensure that everyone has access to affordable health insurance. Three critical tools to achieve this end are 1) expanding Medicaid in states that have yet to do so; 2) making permanent the enhanced subsidies that have lowered the cost of Affordable Care Act (ACA) marketplace insurance; and 3) leveraging statutory waiver solutions to expand access to affordable marketplace coverage at the state level—for example, through public option reform.
The authors would like to thank David Correa and Nicole Rapfogel for their assistance.