Is Raising the Maximum for HSA Contributions Necessary?

Increasing contribution limits on health savings accounts, which is included in a recent bill that has passed the House, may not have the intended desired effect. That's because few HSA account owners contribute the current maximum.

According to the Employee Benefit Research Institute, just 13% of HSA account holders contributed the maximum in 2016, which is the latest available data. The maximum contribution then was $3,350 for individuals and $6,750 for families plus $1,000 additional for single and family coverage when the primary account holder was 55 or older. The comparable current maximums are $3,450 and $6,900 plus an extra $1,000 for account holders 55 and older.

EBRI finds that the longer an account holder has an HSA, the more likely they will contribute the maximum amount. While only 6% of account owners who owned accounts in 2016 contributed the maximum amount that year, 47% of account holders who had owned their account since 2004 or earlier did.

Maximizing contributions also reflects the investment attitudes of account holders and the availability of investments. EBRI found that 44% of account holders who invest their HSA balances contribute the maximum allowed as opposed to 12% of account holders who don't invest.

Not all HSAs, however, allow for investments other than cash equivalents. In 2016, only 3% of the accounts in EBRI's database offered other investment choices.

HSA investments have benefits beyond what 401(k), traditional IRA and Roth IRA accounts offer. Contributions are pretax, like 401(k) contributions; earnings grow tax free, like 401(k) plans and IRAs; but distributions are also tax-free, which is not the case with traditional IRAs funded with pretax money or 401(k) plans. Taxes are not due on Roth IRA distributions, but contributions to Roth IRAs are made on an after-tax basis.

H.R. 6311, the Increasing Access to Lower Premium Plans and Expanding Health Savings Accounts Act, which passed the House last week, would essentially double the limit on HSA contributions — by setting the maximum equal to the out-of-pocket and deductible expenses for HSAs, which is currently $6,650 for individuals and $13,300 for families.

The bill would also allow, at an employer's discretion, the transfer of balances from a flexible spending account or health reimbursement arrangement to an HSA, up to a maximum of $2,650 for individuals and $5,300 for families.

H.R. 6199, the Restoring Access to Medication and Modernizing Health Savings Accounts Act, which also passed the House last week, would allow contributions to an HSA even if a spouse is enrolled in an FSA, which is currently a disqualifying factor, and it would allow for more medical payments not subject to the plan's high deductible. HSA plans are always linked to high-deductible health plans.

— Check out House ACA Employer Health Penalty Bill Gets CBO Budget Impact Score on ThinkAdvisor.