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Health Savings Accounts Need a Major Makeover

March 16, 2021

In 2003, Windows XP was the predominant operating system on most computers. Imagine for a moment how frustrating it would be today if Microsoft was prohibited by law from upgrading and improving their technology beyond that point.

When health savings accounts (HSAs) were created by Congress that same year, the intent was to give people more control over their health care dollars, incentivizing them to be more informed consumers. However, despite a clear need, there have been no significant changes since then. It is beyond time for HSAs to get an upgrade. Efforts in Congress have been made but have yet to gain the momentum needed to enact necessary changes.

HSAs and High-Deductible Health Plans Explained

To contribute to an HSA, one must be covered by an accompanying qualified high-deductible health plan (QHDHP). Outside a set of preventative services approved by the government, a QHDHP must have a minimum “high” deductible that must be met prior to the plan paying for medical services and medication. Essentially, HSAs and QHDHPs are married together. Is it time they get a divorce?

According to CNN Money, in 2003, the average individual deductible was $384. The original “high deductible” for a single person set by the IRS to qualify as an HDHP was $1,000. In 2020, per the annual Kaiser Family Foundation Employer Health Benefits Survey, the average employer plan individual deductible was $1,644.

In 2020 and 2021, the IRS set the minimum deductible to qualify as an HDHP at $1,400. To date, the average deductible for all types of plans, be they HMOs, PPOs, or HSA-qualified plans, now exceeds the “high deductible” definition from the IRS. It is time to remove the requirement to be covered by a QHDHP to contribute to an HSA, so long as an individual has some form of health insurance.

Advantages of Decoupling

The benefits of eliminating this requirement for individuals include tax-deductible contributions, tax-free growth on investments and interest, and tax-free withdrawals — provided the funds are used to pay for qualified expenses. These features offer a triple tax advantage not found in other tax-preferred accounts. In addition, at 59 and a half years old, account holders may withdrawal money from their HSA for any expense. If an expense is not considered qualified, one would only pay their normal income tax rate on withdrawals, much like traditional IRAs.

As opposed to flexible spending accounts (FSAs), HSAs are not a “use it or lose it” proposition. This feature allows account holders total control over when funds are used. In addition, unlike FSAs, one does not make a binding election that can only be changed at a qualifying life event or open enrollment. HSA owners can vary contributions as needed based upon changes to their health and financial circumstances. The portability feature of HSAs allows one to address different needs and phases of life, be it changing employers, becoming a “gig” or 1099 contract employee or becoming an entrepreneur.

Furthermore, the ability to build a balance over time may help offset the estimated $295,000 per couple in expenses needed in retirement. On a related note, current Medicare-enrolled individuals are prohibited from contributing to an HSA. Allowing contributions for those enrolled in Medicare would allow our older population the flexibility to pay for medical expenses with tax-free dollars.

For employers, there are several attractive qualities to decoupling HSAs from QHDHPs. One such advantage is simplified administration of HSAs in comparison to FSAs or health reimbursement arrangements (HRAs). Contributions made by an employer to an HSA are not compelled to continue under COBRA like funds available in an HRA or FSA. HSA funds must also be deposited into the account to be used by the account holder. Conversely, an FSA gives immediate access to the full annual benefit election on day one of the FSA plan year. This could leave an employer “holding the bag” in the event an employee left employment before the amount already used had been payroll deducted.

Additionally, employer contributions to an HSA are free of taxes under the Federal Insurance Contributions Act (FICA), making them a lower-cost dollar to employers than traditional pay. Lastly, employers would have the ability to continue HSA contributions on behalf of employees enrolled in Medicare that may have decided to continue working beyond age 65. Decoupling would allow employers flexibility in designing a more appealing benefits package to attract and retain valuable employees.


Based upon ever-increasing health care costs, as well as the advantages to both individuals and employers as stated, it is time for HSAs to get an upgrade via decoupling.

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For more information on strategic solutions in managing the costs of group health insurance, contact:

Brad Heter
Employee Benefits Advisor


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