IRS Eases Health Savings Account Eligibility Under Trump's Bill Amid Uncertainty Over ACA Subsidies

The US Treasury and the Internal Revenue Service have announced new changes to health savings accounts (HSAs), implemented under US President Donald Trump's 'Big Beautiful Bill'. These modifications could significantly impact how Americans save for healthcare costs, especially as ongoing debates over Affordable Care Act (ACA) subsidies create uncertainty.

HSAs are tax-advantaged accounts designed for medical expenses. Typically, they are available to individuals enrolled in a High-Deductible Health Plan (HDHP). These accounts are popular due to their triple tax benefits: contributions can be deducted upfront from taxable income, the funds grow tax-free, and withdrawals for qualified medical expenses are also tax-free. Moreover, funds in an HSA roll over each year, can be invested, and are not lost if a person changes jobs, making them a flexible tool for healthcare planning and retirement savings.

The recent changes announced by the IRS aim to broaden eligibility for HSAs via HDHPs. According to the IRS, these adjustments will enable more people to 'save and pay for healthcare costs through tax-free HSAs.' In 2024, over 59 million Americans held an HSA, according to a survey conducted by Devenir and the American Bankers Association's Health Savings Account Council, which polled more than a dozen HSA providers.

New Rules to Recognise Bronze Plans as HDHPs

Prior to the new legislation, many bronze and catastrophic plans on the ACA marketplace were not considered HSA-eligible. This prevented enrollees in these plans from making HSA contributions.

However, starting from 1st January 2024, the IRS clarified that bronze and catastrophic plans available through an exchange will now be recognised as HSA-compatible, even if they do not meet the traditional definition of an HDHP. Consequently, individuals enrolled in these plans can begin making HSA contributions. Importantly, it is not mandatory to purchase health plans through the ACA exchange to qualify for HSA contributions.

Telehealth and Remote Care Services

The new rules also make permanent the 'safe harbour' for certain telehealth and remote health services for HDHPs. This provision was temporarily introduced during the COVID-19 pandemic.

Under the Trump bill, individuals can utilise telehealth services before meeting their HDHP deductible without losing eligibility for HSA contributions. This expanded access aims to make remote healthcare more accessible and affordable. The new regulation takes effect for plan years starting from 1st January 2025.

Primary Care Arrangements

Additionally, the legislation permits eligible individuals enrolled in specific direct primary care (DPC) service arrangements to contribute to HSAs, starting from 1st January. DPC services, which are not billed through insurance, will not affect HSA eligibility. Furthermore, enrollees can use their HSA funds tax-free to pay for DPC fees, according to the IRS. This move could provide more flexibility for those seeking alternative primary care options outside traditional insurance models.

The Tussle Over ACA Subsidies

The IRS update comes amid ongoing political debates over the future of ACA marketplace subsidies. This issue is particularly urgent as the COVID-era tax break, which reduced premiums for ACA plans, is set to expire this year unless Congress intervenes.

A health policy research group estimates that over 22 million people, or roughly 90% of ACA enrollees, currently receive subsidies. While Democrats are pushing to extend these subsidies, Republicans have proposed alternative solutions, leading to a politically charged standoff.

As the debate continues, the recent IRS measures provide some relief and increased flexibility for healthcare savings, but the broader policy landscape remains uncertain. The outcome of negotiations on ACA subsidies could significantly influence the affordability and accessibility of health insurance for millions of Americans in the coming years.

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