President Bush's proposal to expand health savings accounts, intended to help contain spiraling medical costs, might prove a tax-free boon for the nation's rich.
Supporters and opponents of the proposal said the enhanced HSAs offer unprecedented tax advantages and might become more attractive than 401(k)s or Individual Retirement Accounts as a way for the richest and healthiest Americans to build savings.
The proposal would create "the mother of all tax shelters," said Paul Caron, a professor at the University of Cincinnati College of Law.
The plan, which would cost the government $156-billion in forgone revenue over a 10-year period, is the centerpiece of Bush's effort to reduce health care costs and extend coverage.
Bush and his allies say the HSAs will encourage consumers to shop for less-expensive care, fostering competition that will bring prices down.
"One way to help control costs is to interject market forces, and one way to do that is through health savings accounts," Bush said.
Bush's 2007 budget proposes allowing Americans who buy high-deductible health insurance to save as much as $10,500 per family to cover medical expenses.
The HSAs would be the only investment accounts to combine a tax deduction and a tax credit for deposits, tax-free earnings growth and untaxed withdrawals for expenses not covered by insurance. Money remaining in the accounts can grow indefinitely.
"This is the gift that keeps on giving," said former Internal Revenue Service commissioner Don Alexander, who ran the agency under Presidents Richard Nixon and Gerald Ford and is a partner at Akin, Gump, Strauss, Hauer & Feld in Washington.
John Goodman, president of the National Center for Policy Analysis in Dallas and an advocate of HSAs, said the tax incentives are appropriate because the accounts serve two purposes.
"This isn't just a savings account," he said. "It's self-insurance for health care."
Proponents such as Goodman say expanded HSAs will allow the equal tax treatment of people who buy their own insurance and those who get insurance benefits from their employer that aren't subject to any tax. Most people who buy their own insurance pay for it with after-tax dollars.
The accounts proposal favors the wealthy because they are more likely to have the disposable income to contribute the maximum.
And it favors the healthy because they have fewer out-of-pocket medical expenses that would deplete the account.
Steven Bankler, a certified public accountant in San Antonio, Texas, who has provided accounting analysis to congressional committees, said the only clients he has for HSAs are people who intend to use them to shelter savings from taxes.
"The wealthier, healthier people think it's very advantageous," Bankler said. "To them, it's a savings account. But for a client with diabetes, his out-of-pocket medical costs are going to be the maximum. There is really no savings."
The Government Accountability Office, the nonpartisan investigative arm of the U.S. Congress, said in a January report that the federal program offering HSAs to government workers as an alternative to traditional health insurance coverage is attracting primarily the healthy and the wealthy.
Although enrollment in the federal plan has been modest, the GAO said "aspects" of the plans "such as the greater financial exposure coupled with the potential for tax-advantaged savings - uniquely attract higher-income individuals with the means to pay higher deductibles and the desire to accrue tax-free savings."