Health Savings Accounts (HSAs) are a rising star in health care reform. Over 3 million Americans are currently enrolled in HSAs, which represents a tripling of enrollees since March 2005, and 40 percent of those enrollees were previously uninsured.
Not only are HSAs expanding access to health care, they are doing so while increasing choice and decreasing costs. HSAs give health care consumers greater control over health decisions, and in 2006 the costs of HSAs increased at one-third of the increase of traditional health care plans.
States ought to be doing everything possible to promote HSAs as an option for citizens to obtain healthcare coverage. Unfortunately, the State of Wisconsin is missing a critical component of HSA legislation that would facilitate that choice: HSA contributions are not tax deductible from state income taxes.
As one of only four states to prohibit deductibility, there is an urgent need for Wisconsin to correct this error. Gov. Jim Doyle was given the opportunity to provide citizens with this tax deduction three times in his last term but vetoed the measures each time.
This blog will examine the benefits that could have been made available to the people of Wisconsin had the measures been signed into law and show that the concerns of HSA opponents, including Doyle, are misguided. Based on the evidence, it will be argued that the people of Wisconsin deserve the same tax-deductible treatment available in other states for HSA contributions, and it will be shown that broadening the scope of opportunity for Wisconsinites with HSA deductions will enhance cost savings, choice and, above all, health.
The key hallmark of HSAs is that contributions to the savings account are 100-percent tax-deductible against one’s federal income tax liability. Annual contributions are capped at $2,850 for an individual and $5,650 for a family, and there is no required minimum deposit. Employers are also permitted to make contributions to an employee’s HSA, and employer contributions are excluded from income, exempting an employee from paying FICA or income taxes on the employer’s contribution.
But advantages extend well beyond tax benefits. HSAs empower both individuals and employers with greater health care freedom. First of all, individuals own HSAs, and this creates an opportunity for people to accumulate personal savings for their health care over the course of one’s life.
Ownership also makes HSAs fully portable, no matter if an individual becomes unemployed or changes jobs. Individuals can even choose to purchase HDHPs and open HSAs if they are unemployed or work for a company without an insurance plan.
Dollars in the HSA also roll over from year to year to allow for accumulated savings. Fully 50 percent of HSA enrollees had funds that could be rolled over from 2005 to 2006 to create health care nest eggs.
Second, HSAs are more flexible than traditional health insurance plans because the individual maintains control over how HSA dollars are spent. A patient could chose to purchase alternative care, such as acupuncture, that many traditional health plans will not cover. Dollars can also be used to cover expenses on everything from aspirin to contact lens solution or for extended coverage such as insurance premiums for long-term care. This flexibility provides individuals with more control and customizable care to suit their health care needs, which has earned HSA plans the nickname of "consumer-driven health care."
Third, HSAs help keep costs down. Under traditional insurance plans, patients rarely observe the true costs of health care because they pay, at most, very small co-pays, and this encourages overuse. HSA users are more closely connected with the costs of their care, which makes these users more cautious in health care consumption.
By not having to fund excessive use, HSA plans are able to keep premiums low – a benefit for individuals and employers who wish to offer health coverage to employees.
Employers can save as much as $1,000 per employee with HSA/HDHPs, compared with other insurance options. Giving HSA contributions a state tax exemption ensures a level playing field among all health insurance options. Conversely, denying tax deductibility of HSA contributions puts HDHP plans and the individuals who chose them at a disadvantage.
Finally, tax deductions save citizens money and reward them for making healthy choices.
Because of the tremendous advantages of tax deductibility, nearly every state offers the same deduction offered at the federal level against state income tax liabilities. Alabama, California, New Jersey, and Wisconsin are the only exceptions.
Prohibiting deductibility undermines HSAs and all of the benefits that they bring to individuals and employers, and in Wisconsin the harm being done is particularly acute.
For one, Wisconsin imposes double-penalties on HSA contributions. Not only are individuals barred from deducting contributions off their state income tax, but the deduction they receive from their federal taxes must be added back on to their state taxes on Wisconsin Schedule 1.
Employers also suffer a double penalty. Any contribution an employer makes to an employee’s HSA counts as taxable wages, and the employer must pay taxes on those "wages."
Allowing state deductibility would remove these penalties.
For another, rollovers to HSAs are generally tax deductible, except in the state of Wisconsin.
HSAs are not a "windfall" for the wealthy. The argument that HSAs only benefit wealthy individuals simply does not match up with the evidence. A survey by eHealthInsurance, an online insurance company, reported close to half of HSA users had incomes of less than $50,000 a year, compared with only 20 percent of HSA enrollees who had incomes over $100,000.
To create greater opportunity for health and health coverage, the prohibition against deducting HSA contributions from Wisconsin taxes ought to be removed.
Nicola Moore is with Heritage Foundation and wrote this article as policy advisor to Americans for Prosperity Foundation-Wisconsin Chapter. Both organizations are located in Washington, D.C.
