Human Capital & Careers

Lawmakers: Workers Use HSAs as Tax Shelters

After four years, the concept of health saving accounts is still floundering. In fact, workers are using the plans for the wrong reasons, says a ne...
Sarah JohnsonApril 30, 2008

Health savings accounts were created on the premise that they would make employees more responsible for their health-care costs and help suppress the rising medical expenses at companies, and in the U.S. overall. However, it turns out that many participants of the high-deductible health plans are using them for their tax advantages rather than health-care savings.

In fact, HSAs are more popular among wealthy Americans than those with low incomes. The average adjusted gross income of 2005 tax filers who participated in HSAs was $139,000 compared to the average income of $57,000 for all other taxpayers, according to a U.S. Government Accountability Office report released on Wednesday.

Lawmakers plan to use the GAO finding to support their claims that the four-year-old HSA concept is faulty. “[HSAs] aren’t the answer for providing adequate health insurance coverage for the average American,” said California Democrat Representative Henry Waxman, chairman of the House Oversight and Government Reform Committee. “This report provides further evidence that we need to reexamine whether this is the right way to use the government’s resources to address our health-care needs.”

The GAO also reports that in 2005, the total value of HSA contributions was double the amount of withdrawn funds ($754 million compared to $366 million). Waxman’s committee suggests the lack of HSA spending shows some employees are using the plans as a tax shelter device rather than its intended purpose as a way to save on health-care costs.

HSAs were borne out of a Medicare reform law four years ago to give workers access to pre-tax dollars that could be used for out-of-pocket medical expenses. Employees fund their accounts, which are portable, for current or future medical bills. Some employers contribute to these plans; a Mercer survey conducted in 2007 showed large companies on average paid $626 for each worker enrolled in an HSA.

Despite their promised benefits, HSAs are not hugely popular. According to the GAO, more than 40 percent of eligible workers do not have an account. At the same time, the number of people who are eligible to use HSAs has grown from 438,000 in 2004, to 4.5 million in 2007.

The GAO attributes the lack of participation to employees thinking that they cannot afford an HSA, or their lack of knowledge about what the plans can do. In addition, lawmakers claim HSAs are not always used for healthcare services and items. According to Waxman’s committee, HSA funds have been spent on escort services, casinos, and bowling centers.

Based on reports that the funds are being misused, the House passed legislation two weeks ago that would require workers to prove their withdrawals were actually used for medical expenses. Stricter rules would make HSA requirements more like another type of tax-deferred plan, flexible spending accounts. The bill is currently with the Senate Finance Committee.