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History of Health Savings Accounts - MSAs to HSAs

HSA • May 15, 2012 at 7:03 AM • Written by: PeopleKeep Team

The history of health savings accounts, or HSAs, goes back to the 1980s and 1990s when Congress began discussing medical savings accounts (MSAs)

In the 1980s and 1990s, Congress began discussing medical savings accounts (MSAs) where any consumer could (1) pay for all medical expenses with tax-deductible dollars and (2) spend or save unlimited tax-advantaged amounts for current or future medical expenses.

In 1996, Congress created the Archer Medical Savings Accounts experiment, named after Representative Daniel Archer, who sponsored the MSA amendment to HIPAA, allowing a limited number of MSAs for a trial period. MSA eligibility was severely restricted to up to 750,000 self-employed taxpayers, and, despite their enormous tax advantages, they were complex, and only 150,000 MSAs were eventually opened before they were made obsolete by health savings accounts (HSAs) in 2003.

Throughout 2003, with the existing MSA legislation set to expire on December 31, the federal government debated new legislation to expand the MSA experiment. The White House wanted universal Health Savings Accounts, similar to IRAs, that could be opened by any U.S. taxpayer and pay for any medical expense, including health insurance premiums. Such an HSA could have become a universal employee, employer, and retiree health benefits vehicle.

However, Congress was greatly concerned about the budget implications of the White House request, particularly since Congress was also debating the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) which was expected to cost $400 billion over 10 years (in 2005 the MMA cost was later revised to $1.2 trillion).

The end result was a watered-down version of Health Savings Accounts (HSAs), created via an amendment to the overhaul of Medicare in the MMA bill, and signed into law on December 8, 2003. Importantly, the bill placed five restrictions on HSAs, which combined to make HSAs fall short of their potential.

Only U.S. taxpayers already covered by highly restricted “HSA-qualified” health insurance plans could open Health Savings Accounts

Additionally, other supplemental insurance coverage by a spouse or employer could automatically disqualify taxpayers from making HSA contributions.

This made most of the U.S. population ineligible for HSAs until, and if, their employer modified their health benefit plan.

HSA funds generally could not be used to pay for health insurance premiums

HSA funds could not be used to pay for health insurance premiums, except when the account owner was legally unemployed, on COBRA, over age 65, or using HSA funds to pay for long-term care premiums.

This kept HSAs as supplements to a health benefits plan rather than as substitutes for an employer-sponsored health benefits plan.

Taxpayers received tax deductions only for “contributions” to their HSA and then received no further tax incentive (or disincentive) to take distributions.

Economically, this made HSA funds the “money of last resort” for taxpayers to use for current medical expenses. Money in an HSA continues to appreciate and accumulates interest and/or dividends tax-free and can be taken out at any time, tax-free, to reimburse a medical expense—even one that may have been incurred decades earlier.

Total annual contributions to an HSA, regardless of the source, were capped. (In 2013 this cap is $3,250 for an individual and $6,450 for a family.)

Additionally, if employers contribute to their employees’ HSA accounts, they have to do so equally without regard to each employee’s actual medical expenses.

This destroyed the primary economic reason for small to mid-size employers to switch to HSA-qualified health plans: Cost Savings. By raising the annual deductible on a fully insured employer-sponsored group health policy (e.g. from $500 to $3,500), an employer typically lowers their annual premium by 30-50%.  However, so that employees do not incur higher out-of-pocket costs, the employer would have to contribute $3,000 ($3,500 less $500) each year to each employee’s HSA regardless of whether they had any medical expenses.

Employers could not restrict (or, due to HIPAA, even know) what employees did with their HSA funds once the employer contribution was made.

This prevented employers from designing HSA-powered programs coordinated with the objectives (e.g. wellness, savings) of their primary group health plan coverage.  HSAs thus became a “black box” for employers once their contributions were completed.

Thus, HSAs could not be the universal health savings vehicle to help people afford health insurance, help pay for medical expenses, or enable employers to create more effective health benefit plans.  Instead, Congress converted HSAs into a healthcare retirement tool, much like 401(k)s or IRAs.

HSAs combine the benefits of both traditional and Roth 401(k)s and IRAs for medical expenses.

Taxpayers receive a 100% income tax deduction on annual contributions, they may withdraw HSA funds tax-free to reimburse themselves for qualified medical expenses, and they may defer taking such reimbursements indefinitely without penalties.

HSAs are unique—“IRAs on Steroids”—with triple tax advantages:

  1. Tax-deductible contributions,
  2. Tax-free accumulation of interest and dividends tax-free,; and
  3. Tax-free distributions for qualified medical expenses.

Every U.S. taxpayer should have an HSA to save money for retirement healthcare expenses—even maximizing their HSA contributions before contributing to other retirement vehicles.

HSAs are not the optimal health benefit solution for employers, who:

  1. Want employees to have proper economic incentives today to stay healthy and reduce their current medical spending,
  2. Seek to reduce the ever-increasing cost of their  group health benefits plan, or
  3. Are looking for an affordable replacement to a group health benefits plan altogether for either current or formerly ineligible employees.

The best way employers can achieve all three of these objectives is by using Health Reimbursement Arrangements (HRAs).

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