What The Better Care Reconciliation Act means for FSA/HSA users
It has been a busy week in Washington, as the Senate Republicans have finally unveiled their version of H.R. 1628, the American Health Care Act of 2017 (AHCA), which was passed by the House of Representatives on May 4, 2017. On June 22, Senate Republicans released The Better Care Reconciliation Act, which added further tweaks to the AHCA legislation and included various regulations that will directly affect consumer-directed healthcare account users.
Flexible spending account (FSA) and health savings accounts (HSA) will see a number of important changes from the regulations set forth in the bill. These include:
- Repeal of the OTC Rx requirements for FSAs/HSAs:
The OTC Rx provision was originally included in the Affordable Care Act (ACA), and the Better Care Reconciliation Act will fully remove the provision for FSA and HSA users to obtain a prescription for OTC drugs. The proposed effective date is for expenses incurred after December 31, 2016.
- Repeal of the FSA maximum contribution:
As of 2017, FSA users could set aside up to $2,600 as single individuals and $5,400 for families to cover qualifying medical products and services during their current plan years. The Better Care Reconciliation Act would allow the plan sponsor to set whatever maximum they wish. The proposed effective date would be for plan years beginning after December 31, 2017.
- HSA yearly maximum contributions would increase:
HSA contribution limits have grown steadily in the past decade adjusted for inflation, growing from $3,050 for single individuals in 2010 to $3,400 for single individuals in 2017. The Better Care Reconciliation Act will almost double these limits for HSA users to $6,550 for single individuals and $13,100 for families. The effective date for qualified HSA contributions after December 31, 2017.
- HSA catch-up contributions expanded
When an HSA user reaches middle age, he/she is able to make a catch-up contribution (up to $1,000) to save in excess of the yearly contribution limit on an annual basis. The proposed legislation would keep these HSA catch-up contributions in place, but they would now be allowed for both spouses age 55 and up, as opposed to restricting contributions to the HSA holder alone.
- HSA tax penalties reduced
The Better Care Reconciliation Act also revamps the tax penalty for use of HSA funds on non-qualified expenses. Today, if an HSA user before the age of 65 withdraws HSA funds to cover non-qualifying expenses, he/she would be charged a 20 percent penalty on that amount. The Better Care Reconciliation Act would restore this tax to non-qualified HSA distributions to the pre-Affordable Care Act amount of 10%. Special rules that would allow some expenses incurred prior to the establishment of the HSA to be qualified as well.
- Further extension of the Cadillac Tax:
The Cadillac Tax is a 40% excise tax on the value of coverage exceeding set thresholds that was set to begin in 2020, which currently includes contributions to FSAs/HSAs. The tax was designed to be levied on only the most expensive employer-sponsored health insurance plans—the so-called Cadillacs of health coverage. This regulation was one of the more controversial aspects of the ACA, as while it is a tax on insurance companies, it was feared that these increased costs would be passed off onto employers, and eventually the employees themselves (IB Times, 2015). The Better Care Reconciliation Act would further delay implementation of the tax to taxable years after December 31, 2015.
The Senate is expected to fast track The Better Care Reconciliation Act for a vote before the July 4th holiday. The Congressional Budget Office (CBO), that rates proposed legislation to include potential cost and impact, has promised a score on the new bill early next week.The bill is expected to face challenges with four Senate Republicans currently voicing concern with the bill. In order for the bill to pass, no more than two Senate Republicans can vote against it, and Vice President Mike Pence would be the tie-breaking vote in the Senate if no majority prevails.