BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
SBx6 13 - Dutton
Introduced: March 1, 2010
Hearing: May 12, 2010 Tax Levy Fiscal: Yes
SUMMARY: Conforms to Federal Law Regarding Health Savings
Accounts (HSAs)
EXISTING LAW does not include the amount of an
employer's contribution to an accident or health plan for
the benefit of the employee or the employee's spouse in the
employee's gross income.
Allows ordinary and necessary business expenses to be
deducted, including health care coverage premiums paid by
an employer for accident or health plans for employees.
Allows self-employed persons to deduct from gross
income 100% of amounts paid for health insurance for
themselves, spouses, and dependents.
Provides various tax credits, designed to provide tax
relief to taxpayers that incur certain expenses (e.g.,
child adoption) or to influence behavior, including
business practices and decisions (e.g., research credits or
economic development area hiring credits). Current state
laws do not provide tax credits for any health care costs.
Federal Law
Defines "a high deductible health plan" (HDHP) for
2004 a health plan with an annual deductible of at least
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$1,000 for individual coverage ($2,000 for family coverage)
and maximum out-of-pocket expenses of $5,000 for individual
coverage ($10,200 for family coverage.)
Provides for health savings accounts (HSA) which are
trusts created in the United States that are used
exclusively for the purpose of paying the qualified medical
expenses of the account beneficiary. HSAs are available to
individuals who are covered under a HDHP and are not
covered under any other health plan, which is not a high
deductible plan.
California has not conformed to the federal HSA
provisions.
Allows a refundable credit for the cost of health
insurance equal to 65% of the expenditure. Individuals who
are eligible for the credit are limited to the recipients
of the following: Trade Adjustment Assistance (TAA),
alternative TAA, or Pension Benefit Guaranty Corporation
(PBGC) assistance. The cost to purchase health insurance
for certain family members of the taxpayer may also qualify
for the credit. Federal law provides minimum requirements
for a health insurance plan, namely maximum deductible
amounts.
THIS BILL conforms to federal law by allowing
taxpayers to deduct contribution to HSAs from income and
allows employers to exclude from an employee's gross income
employer HSA contributions, effective for taxable years
beginning on or after January 1, 2010. SBx6 13 reduces the
disqualified distribution penalty applicable to HSAs from
the federal percentage of 10% to 2.5% for state purposes,
consistent with state law regarding Individual Retirement
Accounts (IRAs). The measure also allows tax-free
rollovers from MSAs to HSAs as well as rollovers from one
HSA to another.
FISCAL EFFECT:
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According to FTB, SBx6 13 results in revenue losses to
the state of $65 million in 2010-11, $55 million in
2011-12, and $65 million in 2012-13.
COMMENTS:
A. Purpose of the Bill
HSAs are private accounts in which individuals can
make tax deductible contributions with a maximum amount for
each year. The funds in these accounts are designed to be
used at the discretion of the enrollee for basic medical
needs. HSA enrollees are also enrolled in High Deductible
Health Plans (HDHPs), HDHPs provide low premiums with
relatively high deductibles ($1,100 for a single person and
$2,200 for family) and maximum out-of-pocket limits ($5,600
for a single person and $11,200 for a family). Many HDHPs
also cover preventative services.
B. Health Care Costs
Proponents of HSAs maintain that they can reduce
overall spending on health care by giving consumers more
control over their health care costs. President Bush's
Council of Economic Advisors says "health insurance in the
United States has now also become a vehicle for financing
relatively low-cost, routine expenditures" and "has
important consequences: (1) It encourages consumers to
overuse certain types of health care. (2) It gives little
incentive for consumers to search for the lowest-price
providers. (3) It distorts incentives for technological
change."
The author states that "HSAs provide more control
over healthcare costs. Participants decide how to spend
the money in their account based on their own healthcare
needs and they keep what they do not spend." This concept
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of providing consumers with more control over healthcare
costs is central to the argument of how HSAs may reduce
healthcare costs over time. The President's Council of
Economic Advisors states, "As more consumers shift into
high-deductible plans, there is greater potential for
slowing price growth and increases in cost-reducing
technology, which could benefit even consumers in
traditional insurance plans." Furthermore, proponents
state that a high deductible forces consumers to be more
aware of the cost of routine medical procedures and that
this increased price awareness and sensitivity will in turn
control health care costs.
Opponents of this measure state that this bill does
not reduce costs at all; instead, it merely shifts the cost
from a traditional employer provided healthcare system to
the employee. Furthermore, these types of plans provide
less healthcare in the form of prevention and annual check
ups and more insurance for catastrophes.
C. Rich Tax Incentive
HSAs are the only savings account with both
tax-deductible deposits and tax-free withdrawals, provided
those withdrawals are for qualified medical expenses.
Additionally, HSAs have no income limits. Comparatively, a
traditional IRA generally allows contributions to be tax
deductible, but treats withdrawals as income subject to
tax. Contributions to a Roth IRA are taxable but qualified
withdrawals are tax-free and Roth IRAs have income limits
restricting eligibility.
D. Usage: High Income Individuals
In August 2006, the United States Government
Accountability Office issued a report titled,
"Consumer-Directed Health Plans: Early Enrollee Experiences
with Health Savings Accounts and Eligible Health Plans."
The report stated that the median income of tax filers
reporting an HSA contribution in 2004 was $133,000.
Additionally, 51 percent of those tax filers contributing
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to an HSA had an income of $75,000 or more. According to
the report, "HSA-eligible plan enrollees had higher incomes
than comparison groups."
The report also stated that, "In addition to using
HSAs to pay for medical and other expenses, account holders
appear to use their HSAs as a savings vehicle. About 55
percent of those reporting HSA contributions to the IRS in
2004 did not withdrawal any funds from their account in
2004. We could not determine whether HSA-eligible plan
enrollees accumulated balances because they did not need to
use their account (that is, they paid for care from
out-of-pocket sources or did not need health care during
the year) or because they reduced their health care
spending as a result of financial incentives associated
with the HSA-eligible plan. However, many focus group
participants reported using their HSAs as a tax-advantaged
savings vehicle, accumulating their HSA funds for future
use."
Opponents to this measure cite this report as further
evidence of the fact that HSAs are generally used by
wealthier individuals and are not accessible to lower
income people.
E. HSAs could move the employers away from low deductible
plans
In the past, opponents of HSA accounts are concerned
that it could result in employers no longer offering low
deductible health plans, opting for high deductible plans
instead, and shifting the costs to employees. The
opponents further stated that "high deductible health plans
and savings accounts hurt poor people who simply cannot
afford to buy high deductibles and are barely making ends
meet." Opponents further argued that HSAs are an example
of adverse selection where one healthy group of people is
more likely to use the high deductible programs than a less
healthy group of people that cannot afford the deductibles.
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F. Conformity
This bill conforms California law to federal HSA
provisions beginning with tax year 2006, however HSAs were
established beginning with tax year 2004. California is
only one of five states that do not conform to these
accounts. California does not automatically conform to
federal law but instead considers each provision
individually in order to analyze each individual policy.
The Legislature recently enacted SB 401 (Wolk), which
conforms state law to specified federal laws enacted after
January 1, 2005 and before January 1, 2009, but did not
include HSA conformity.
Support and Opposition
Support:California Taxpayers' Association, California
Chamber of Commerce, Association of California Life and
Health Insurance Companies
Oppose:None received.
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Consultant: Colin Grinnell
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