A Better Way Forward: Enable Tax Free Savings for Medical Expenses


Our health-care system creates a perverse incentive against saving for future health-care needs. The amount spent by an employer on an employee’s insurance premium is tax free to the employee, but an amount that an individual chooses to save for future health-care needs is not. That strongly encourages people to spend today rather than save for tomorrow—an incentive that both inflates the cost of insurance and reduces savings.

Health Savings Accounts (“HSA’s”) begin to address this problem, but the amount they permit families to save tax free is limited. HSA’s combine a tax-free savings account, which builds interest and grows over time, with a higher-deductible insurance plan that covers catastrophic health expenses. They usually offer significantly lower premium costs, and they encourage people to take control of their own health coverage and to act as engaged consumers—choosing high-value options and encouraging health-care providers to offer more such options. More than 13 million Americans have chosen this approach to health insurance since it first became available 9 years ago.

Under current law, individuals are only allowed to deposit $3,100 into their HSA tax free each year, and families may only deposit $6,250. Moreover, premiums paid for HSA plans are only tax-free if they are purchased through an employer. The benefits of tax-free savings for medical expenses could be greatly expanded.

Our health-care system should not discourage people from saving for their family’s future health needs, or create financial incentives to overspend. A better system would give people more options to exert more control over their own health coverage and care.

Key reforms for achieving that goal include:

• Allowing anyone purchasing an HSA to deduct the premium costs for their insurance policy from their own income taxes and to deduct all HSA contributions from payroll taxes as well as income taxes—so that people buying their own insurance are not denied access to tax-free savings for health care.

• Eliminating or significantly raising the cap on contributions to HSAs—so that people can save as much as they believe they might require for health expenses, not only enough to cover the annual deductible.

• Eliminating the requirement that HSAs be attached to high-deductible plans—so that people can save money tax-free for future health expenses regardless of how they are otherwise insured.

Reforms like these would help strengthen Health Savings Accounts and turn them into powerful tax-free savings vehicles for health expenses, enabling Americans to think about health spending the way they think about other major expenses—planning for the future, making careful cost-conscious choices, and seeking the best value for their dollar.

“January 2012 Census shows 13.5 million people covered by Health Savings Account/High Deductible Plan,” America’s Health Insurance Plans (AHIP), Center for Policy Research, May 2012, http://www.ahip.org/HSA2012/.
See: http://www.irs.gov/pub/irs-drop/rp-11-32.pdf.