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Tax Bill Spurs Health Savings Account Battle

By Richard Rubin, CQ Staff

April 14, 2008 -- The House's routine April 15 tax bill (HR 5719) has become the setting for a fight over health savings accounts.

Democrats, seeking a revenue-raising offset and pointing to HSA money spent at escort services and casinos, want to require individuals to prove that their tax-free withdrawals from the accounts are being used for medical purposes. Such reporting tends to improve tax compliance, and non-medical expenditures are taxed.

Republicans and companies that benefit from the accounts are fighting back, arguing against a rush to judgment and warning about the consequences for the roughly 7 million people with HSAs.

The White House issued a veto threat late Monday, singling out the provision among its reasons.

Even the company that brought potential non-medical spending to the Ways and Means Committee's attention declared its opposition to the bill April 11.

"The committee bill just goes too far too fast at this point," said Robert Patricelli, CEO of Evolution Benefits, based in Avon, Conn. "Our data may indeed have started all of this, but it was intended to be something to mitigate a risk to the program, which, frankly, we still see."

Evolution's opposition was merely an effort to contain the blowback from the company's business partners, said Dan Perrin, president of the HSA Coalition, a group that includes doctors, dentists, banks, and insurance companies. It is preparing for more intense lobbying.

"The HSA community is like a wagon train that's used to circling its wagons," Perrin said. "And that's something we do pretty well, and I would be shocked if every single person with an HSA didn't know about this sometime in the next six weeks."

Health savings accounts are a tax-advantaged option available to people who have a high-deductible health insurance plan. HSA users can set aside tax-deductible money and invest it, then pay no taxes if they use the money for medical purposes.

Users of flexible spending arrangements (FSAs), which are similar to HSAs, are already familiar with having to prove they used the money for health reasons. Evolution Benefits has a patent on point-of-sale technology that rejects FSA cards if individuals use them for non-medical items.

But FSAs and HSAs are different and should be treated differently, industry officials argue. The flexible arrangements are owned by employers, and any unused money goes to the employer. HSAs, in contrast, belong to the taxpayer, and unused money remains in the account.

Requiring Proof
The provision in question would require substantiation or proof that distributions from HSAs after Dec. 31, 2010, are made for medical reasons. Non-medical withdrawals are permitted, but, as under current law, they are taxed as income and assessed a 10 percent penalty.

The Joint Committee on Taxation estimates that the provision would raise $308 million over 10 years, in part because more people would pay the penalty and in part because fewer people would use HSAs to defer or avoid taxes.

It's unclear how often HSA owners use their money for non-medical purposes without paying the 10 percent penalty. During last week's committee markup, Treasury benefits tax counsel Tom Reeder testified that 8.4 percent of HSA owners listed at least some of their distributions as taxable income.

Patricelli said Evolution's internal data show that 23 percent of HSA transactions and 12 percent of HSA funds are spent at non-medical providers. But that doesn't mean they are spent on non-medical purchases. Grocery stores often have pharmacies, for example, and gasoline purchases for travel to the doctor's office are medical expenses.

In a bill markup last week, Republican Paul D. Ryan of Wisconsin offered an amendment to strike the HSA provision. It failed, 15–24, with Jon Porter, R-Nev., joining all Democrats who were present on the "no" side.

A statement of administration policy from the White House Office of Management and Budget said the reporting requirement was "unnecessary for efficient tax administration, inconsistent with the flexibility purposely afforded HSAs at their inception, and could undermine efforts by employers, individuals, and insurers to reduce health care costs and improve health outcomes by empowering consumers to take greater control of health care decision-making."

The veto threat also took aim at another contentious provision in the bill, which would prohibit the IRS from using private debt collectors to pursue tax delinquents. Democrats and the union representing IRS employees criticized the program, pointing to declining revenue estimates and suggesting that additional IRS employees would generate more money.

Republicans emphasized the safeguards in the program and noted that IRS officials use the program to go after accounts they would not otherwise pursue.

"Terminating this program would result in a loss of $578 million in revenue over the next ten years, according to Congress' Joint Committee on Taxation," the administration statement said.

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