Bipartisan Effort Would Add Another Way to Save for Health Care Expenses

Last week, a bipartisan group of lawmakers introduced a bill to create a new type of tax-advantaged savings account to be used for medical expenses. The Health Out-of-Pocket Expense (HOPE) Act (H.R. 9394) would allow anyone with qualifying health coverage to contribute up to $4,000 annually ($8,000 annually for families).

Qualifying health coverage is defined to include those with minimum essential coverage as provided under Code Sec. 5000A(f), such as coverage on the commercial market or via Medicare or Medicaid. It also includes those covered via the Indian Health Service.

Employers also could contribute to the accounts, up to 50% of the applicable annual limit. But while contributions made by individuals would not be deductible, employer contributions to accounts of those with $100,000 or less in gross income ($200,000 or less for married couples filing a joint return) would be excluded from adjusted gross income.

Distributions from HOPE accounts used to pay for qualified medical expenses would not be included in the beneficiary’s gross income. HOPE accounts would “be similar to a Roth savings account,” explained a press release, but would allow savings specifically for future health care expenses.

Note. Under Code Sec. 408A, an individual can make nondeductible contributions, up to certain amounts, to a Roth IRA, and qualified distributions are tax-free. (For more on Roth accounts, see Checkpoint’s Federal Tax Coordinator ¶ H-12290 et seq.)

Contributions to other types of tax-advantaged health accounts — namely health flexible spending arrangements (FSAs), health savings accounts (HSAs), certain health reimbursement arrangements (HRAs), and Archer medical savings accounts (Archer MSAs) — reduce the maximum amount that may be contributed to a HOPE account in the same year.

Representatives Blake Moore (R-UT), Jimmy Panetta (D-CA), Brian Fitzpatrick (R-PA), Brad Schneider (D-IL), Adrian Smith (R-NE), and Raul Ruiz (D-CA) led the introduction. Panetta explains that HOPE accounts would “incentivize Americans to save for future medical expenses not covered by their insurance.” And Smith added that the accounts would “give American families a new tool to protect themselves and their household finances from a surprise illness or injury.”

But is this new tool necessary, given the plethora of other tax-advantaged health care accounts available? Here’s a look at those existing options, and how they differ from the proposed HOPE account.

Health FSAs.

Traditional health plan members and their employers may contribute to a health FSA. Employer contributions that meet certain conditions are excluded from the employee’s gross income both when made and when employees use account funds for medical expense reimbursement.

The maximum annual amount an employee can contribute through salary reductions to a health FSA in 2024 is $3,200.

One important thing to note about health FSAs is that they are subject to the “use-it-or-lose-it” rule, meaning unused funds remaining at the end of the plan year are generally forfeited, unless an exception applies.

For more on health FSAs, see Checkpoint’s Federal Tax Coordinator ¶ H-2461 et seq.

HSAs.

HSAs are trusts available only to participants in high-deductible health plans, as set forth under Code Sec. 223(d). Plan members and their employers can contribute funds to an HSA to be used to pay for qualified medical expenses. Employer contributions to HSAs are not included in the employee’s income and are not subject to employment taxes. Distributions for qualified medical expenses, likewise, are tax-free.

The 2024 annual limit on HSA deductions is $4,150 for self-only coverage and $8,300 for family coverage.

HSAs are portable and stay with an individual when they change jobs or leave the workforce. In addition, contributions stay in the account until they are used.

For more on HSAs, see Checkpoint’s Federal Tax Coordinator ¶ H-1350 et seq.

HRAs.

HRAs are an employee benefit plan to reimburse employees for certain medical expenses that they and their dependents incur and that are not covered by other forms of insurance. They are funded solely by the employer and not through salary reduction election.

Benefits received by an employee under an HRA are treated as amounts received under an accident and health plan and thus are tax-free.

For 2024, the maximum excepted benefit amount for an HRA is $2,100.

HRA balances at the end of a coverage period can be carried forward to future coverage periods, but do not move with an employee who changes jobs.

For more on HRAs, see Checkpoint’s Federal Tax Coordinator ¶ H-1349 et seq.

Archer MSAs.

An Archer MSA is a tax-exempt trust or custodial account to pay medical expenses in conjunction with a high-deductible health plan. However, Archer MSAs have been discontinued, and only active participants as of 2007 may have an Archer MSA, per Code Sec. 220.

Contributions to an Archer MSA by an eligible individual are generally deductible. In addition, distributions from an Archer MSA for medical expenses and earning on accounts are generally not taxable.

For more on Archer MSAs, see Checkpoint’s Federal Tax Coordinator ¶ H-1326 et seq.