House Ways & Means Committee May Impose HSA Documentation Rules
Issue: Tax-Free Payment of Medical Expenses from HSAs
Date: April 8, 2008
Action Taken: The House Ways & Means Committee is planning to mark up (finalize for floor action) on April 9 a “tax day” bill that would, among other things, impose documentation/substantiation requirements on tax-free payments of medical expenses from Health Savings Accounts (HSAs). The HSA documentation/substantiation provision is a pay-for (an offset to make up for the revenue loss in other parts of the bill). The Joint Committee on Tax (JCT) estimates that the HSA documentation/substantiation rules would raise $485 million over 10 years.
Background: The legislation that the Ways & Means Committee will consider tomorrow (April 9) is a collection of provisions aimed at helping taxpayers. The bill, which has not been introduced and thus has no bill number, is titled “The Taxpayer Assistance and Simplification Act.” Its most high-profile provision is one that would prohibit the IRS from using private sector debt collection firms.
Under current law, HSAs (tax-favored savings accounts that are used in conjunction with high deductible health plans (HDHPs) can be used to pay for any “qualified” medical expense. (A “qualified medical expense” is one that would be deductible, without regard to the income threshold, under Internal Revenue Code (IRC) section 213.)
Specifically, the HSA documentation provisions would require trustees of HSAs to report annually both to the Treasury/IRS and to the HSA account owner “the aggregate amount paid or distributed from an HSA that has been determined through independent substantiation…to have been used exclusively for qualified medical expenses.” The annual report must also disclose amounts paid by the HSA for which there is no independent substantiation.
The legislative language also specifies that HSA payments that are not substantiated will be “deemed as not used exclusively for qualified medical expenses” and thus will not qualify as a medical expense. As a result, unsubstantiated expenses paid from an HSA – even if they are pure medical expenses – will trigger income and penalty tax liability.
The HSA documentation rules are designed to work in the same way the documentation rules applicable to Flexible Spending Accounts (FSAs) work. The provisions, if they are enacted, will be effective as of January 1, 2009.
AHIA – NAIFA Health & Employee Benefits Position: A requirement that expenses that can be paid on a tax-free basis must be documented and substantiated, particularly in light of its familiarity in the context of FSAs, is potentially reasonable. However, AHIA, NAIFA’s advocate in the health insurance and employer-provided benefits arena, is watching this issue closely to be sure the implementation of this rule, if it is enacted, is done in a way that will not be burdensome for HSA/HDHP policyholders.
AHIA/NAIFA Staff Contact: For additional information, please contact Diane Boyle at Dboyle@naifa.org.
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