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Could The Death of the Affordable Care Act Mean The Birth Of A New Kind Of Retirement Plan?

Posted by Corey F. Schechter | Mar 02, 2017 | 0 Comments

Contributing Author: Dianne Schechter

A repeal of the Patient Protection and Affordable Care Act (ACA) could mean the rise of a new kind of tax-advantaged investment plan: the Roth health savings account (HSA).

Republican Senators Bill Cassidy of Louisiana and Susan Collins of Maine have drafted a bill to create the Roth HSA to help people pay health insurance premiums and out-of-pocket costs, as part of a plan to replace the ACA.  However, critics worry that Roth HSAs don't go far enough to provide health care to the uninsured and that it is really providing tax-sheltering opportunities for the wealthy rather than increasing health care coverage for all Americans.

No one knows exactly how lawmakers will craft a replacement for the ACA and Trump said that he would not cut Medicare benefits during the presidential campaign; however, it is in your best interest, as a current or future retiree, to know what exactly a Roth HSA is, as well as its pros and cons.

To understand the trade-offs of a Roth HSA, one has to know how regular HSAs work.

In 2003, HSAs were introduced to offer you triple tax advantages: First, contributions are tax-deductible. Second, those contributions can be invested and grow tax-free. Third, withdrawals aren't taxed as long as you use them for qualified medical expenses.

If you use an HSA to pay for unqualified medical expenses, the tax penalty is 20 percent, unless you are 65 or older. That is when you can take money out for whatever you want, but the withdrawals will still be subject to regular income taxes.

A drawback of HSAs is that they are paired with a high-deductible health plan. Such a plan means you'll have to pay a deductible of at least $1,300 for individual coverage and $2,600 for families. The maximum annual out-of-pocket costs for these plans are $6,550 for individuals and $13,100 for families.

In 2017, you (and your employer) can contribute up to $3,400 to an HSA for individuals and $6,750 for families. Account holders age 55 and older can contribute an extra $1,000.  You also can use your HSA to pay for Medicare premiums and out-of-pocket expenses including deductibles, co-pays and coinsurance (except Medigap).

 Under the Cassidy-Collins plan, Roth HSA contributions would not be tax-deductible, cutting off one leg of the triple advantage. However, unlike regular HSAs, you wouldn't need a high-deductible health plan to qualify for a Roth HSA — and you could pay health-insurance premiums with the account.

Eric Remjeske (president and founder of Devenir, an HSA consulting firm in Minneapolis) publicly stated that using a Roth HSA to pay premiums sounds good in theory, but since the average HSA has a balance of $2,000, the account would be quickly exhausted.  Mr. Remjeske favors expanding HSAs as part of health care reform, but prefers Congress would focus on options that "are a little more realistic and doable."

The Cassidy-Collins plan that includes Roth HSAs is just one of many Republican options to repeal and replace the Affordable Care Act.  Be sure to follow our blog page for continuing developments on this issue affecting millions of Americans.

About the Author

Corey F. Schechter

Corey Schechter practices in the areas of Employee Benefits, Employee Stock Ownership Plans, Pension and Profit Sharing Plans, ERISA, ERISA Litigation, Business Law, Qualified Domestic Relations Orders (QDROs), and Employment and Labor Law.

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