Senate Proposal Would Hike Health Savings Account Tax Penalty

   By Victoria E. Knight 
   Of DOW JONES NEWSWIRES 
 

NEW YORK -(Dow Jones)- A health-care proposal by Senate Finance Committee Chairman Max Baucus would double the tax penalty for withdrawing money from health savings accounts to pay for non-medical expenses before age 65.

Baucus, D-Mont., will discuss his proposal later Tuesday with a bipartisan group of six members of the Senate Finance Committee, who have been seeking a compromise on health-care legislation for months.

Money from HSAs can be used to pay for current health-care expenses, such as co-pays and deductibles, as well as to save for future expenses, such as Medicare premiums, on a tax-free basis. In 2009, the maximum annual contributions are $3,000 for individuals and $5,950 for families.

Currently, for individuals aged 65 and over, distributions for non-medical expenses are taxed as ordinary income, while younger account holders are required to pay an additional 10% penalty. The proposal would hike that penalty to 20%, according to the summary. However, unlike a previous proposal unveiled in May by Baucus and Sen. Charles Grassley of Iowa, his Republican counterpart on the committee, the latest version floated by Baucus makes no mention of setting tighter limits on contributions to HSAs, a move which banks and insurance companies warned at the time could discourage savings.

"We are encouraged by the latest developments," says Kevin McKechnie, staff director of the American Bankers Association's HSA Council, which represents banks, insurance companies and their technology providers. "We want to continue working with the Senate Finance (Committee) to make sure that HSAs can be part of their solution" for health-care reform.

Around 9 million people are enrolled in HSA-qualified health plans, according to McKechnie.

Launched around six years ago, HSAs were the cornerstone of the Bush administration's policy for making health care more affordable for American families. The accounts are aimed at lowering insurance premiums for individuals and employers by giving consumers more control over - and a bigger stake in - their health spending. To qualify for an HSA, investors need to be enrolled in an insurance plan that meets certain conditions. This year those include a deductible of at least $1,150 for individual coverage or $2,300 for a family.

Unlike the more widely known and used flexible-spending accounts, savings not needed to pay of out-of-pocket medical expenses can accumulate in an HSA for years, attracting the attention of firms seeking to manage these accounts. More than 2,000 banks, credit unions and brokerage firms offer these accounts.

Financial advisers say maxing out on annual contributions to HSAs, and then covering medical expenses out of pocket without tapping the account, can be an astute way to save for retiree medical expenses.

Democrats resisted the introduction of HSAs, describing them as an "unnecessary $16 billion subsidy" for the wealthy - a criticism they renewed last year after a report by congressional investigators revealed that the adjusted gross income for enrollees in HSAs was about $139,000, compared with $57,000 for all other tax filers.

- By Victoria E. Knight, Dow Jones Newswires; 212-416-2235; victoria.knight@dowjones.co

(END) Dow Jones Newswires

September 08, 2009 18:55 ET (22:55 GMT)

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