On April 15 the House passed the Taxpayer Assistance and Simplification Act of 2008. The provision must now be taken up by the Senate where its prospects are less certain, and the Bush administration has already indicated that it would veto the proposal.
If enacted, effective January 1, 2010 the bill would limit the tax exclusion for health savings account distributions to qualified medical expenses which are substantiated according to flexible spending arrangement rules. In addition, the bill would require HSA custodians to report the total amount of non-substantiated HSA distributions from the prior calendar year to the IRS and the account holder by January 15 of each year.
Current HSA guidance indicates that HSA account holders may take distributions from the HSA for any reason and that account holders are ultimately responsible for self reporting distributions not used for qualified medical expenses; HSA custodians are not obligated to request substantiation with respect to any distribution. If the bill ultimately becomes law, account holders could still take distributions from the HSA for any reason; however, HSA custodians, or their designee, would be obligated to request substantiation in conjunction with the distribution in order to satisfy the reporting obligation created by the bill.
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Points made by Republican members in the House Ways and Means Committee in opposition to the substantiation requirement were:
- There have been no hearings, so the members have only anecdotal information, and the effect on HSAs and health costs is not known.
- The proposal is advanced by a single company, and the proposal will give that company an inappropriate advantage. Other companies working on new technologies will be stifled by this proposal.
- There are significant differences between FSAs and HSAs, including the "use it or lose it" rule, and it is not appropriate to subject them to the same rules. The problems with FSAs were a major reason HSAs were enacted in the first place.
- The substantiation requirements would place banks in a difficult position with their customers, and would require banks to comply with HIPAA and increase costs. Many banks and small businesses don't have the capability to deal with this.
- Increased costs could drive some out of the HSA market, with a negative impact on health care coverage and costs.
- Substantiation is not required for other tax advantaged savings vehicles, like the itemized deduction for medical expenses; the home equity loan deduction, where deductibility may depend on the use of the loan; and the exceptions to the 10 percent early withdrawal tax for certain distributions from an IRA, like education or a home purchase.
The Democratic members relied on information that showed what HSA distributions were used for, and mentioned more than once massage parlors and other "ridiculous" expenses. As a counter argument, the Republicans pointed out that these expenses aren't illegal, but only subject to the 10 percent penalty. They did not point out, however, that it doesn't really matter what the debit card was used for, as long as you have "shoeboxed" expenses that you can verify (which may not have been paid for with the card).
The bill is expected to raise over $308 million in the next 10 years. Joint Tax Chief Kleinbard said their estimate assumes that there will be fewer contributions to HSAs as a result of the proposal, and that the 10 percent tax will be paid on more distributions. They assume 7 million accounts, an average contribution of $2,500, 55 percent of holders make a contribution. He agreed with the Republicans that the revenue estimate, even including the delayed effective date, is "significant." Much of their data is from the Government Accounting Office.
John Hickman is head of the firm Alston & Bird's Health Benefits Practice which is devoted exclusively to HIPAA privacy, flexible benefits, and other health and welfare benefit issues. Hickman has been a pioneer in the consumer-directed health care arena.
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