HSAs encourage tax evasion
HSAs encourage tax evasion
The Journal Gazette
Sep. 5, 2004
New health accounts allow more individual control
By Sherry Slater
Another advantage of HSAs is the ease of paying those expenses. But that ease could tempt participants to skirt the rules. HSA participants can get checks or a debit card tied to the account and use them for co-pays to doctors’ offices or drugstores. The payment methods aren’t labeled as tied to HSAs, however, and clerks aren’t expected to make decisions about which items can legally be purchased with HSA money. The participant should collect all receipts in case of an audit, said (actuary David) Peppler.
“If they never audit you, you can get away with it,” he said. “I’m sure it must be a troubling thing for the Treasury Department because people can cheat on these and (the government will) get less tax revenue.”
http://www.fortwayne.com/mld/journalgazette/business/9589353.htm
Comment: Regardless of whether HSAs (health savings accounts) function as
personal accounts to pay medical bills, or function as retirement accounts for those who have minimal health care needs, these accounts will be highly visible to and under the control of the individual account owner. Is that a problem?
HSAs are very similar to IRAs (individual retirement accounts) with the added advantage that HSAs can be used for health care costs. IRAs are established by individuals who wish to provide a more secure retirement for themselves and who have enough disposable income to fund them. When funds are removed from either type of account for other than their intended purposes, taxes plus penalties are assessed. But a major difference between the two is that withdrawals from IRAs are automatically reported to the IRS, whereas withdrawals from HSAs are not.
Many individuals with IRAs do find reasons to withdraw their funds and pay the taxes and penalties. Such reasons may include business or investment opportunities for which funds may not otherwise be available. Or they may be
withdrawn because of financial difficulties such as an unexpected interval of unemployment or significant financial losses in other personal ventures. Regardless, merely because the funds are there, they will frequently be withdrawn in spite of the tax and penalty consequences.
Now consider the HSAs. Owners of these accounts have in their position a checkbook or debit card that will allow access to their funds with no individual reports generated as to their use. Since it is unlikely that the IRS will demand full accounting of every single HSA expenditure, there is a significant probability that these tax-favored funds can be spent without any oversight as to where they are directed.
In this age in which credit card addiction has caused financial ruin for tens of millions of families, what will be the attitude towards these HSAs? The money is just sitting there not being used. And it’s not really borrowing because it doesn’t have to be paid back. And in the unlikely event that you are caught, the penalty will be that you will be asked merely to pay the taxes you owed anyway with perhaps an additional penalty for late payment. Under these circumstances, many individuals believe that it would be foolish to report distributions that are not used for health care services.
Policies which provide an open and unambiguous invitation for you to violate
the law are bad policies. As HSAs are invaded by their owners, there will be
rampant tax evasion. Failure to pay taxes is a crime against your fellow Americans who are then footing your share of the national tax bill. To provide temptation without risk of significant punishment encourages this crime against your fellow citizens. This, in turn, diminishes your respect for yourself and for our national institutions.
Undoubtedly some would consider this to be nit-picking. But providing temptation with a low risk of being caught is a real issue. Form 1099-INT was established because too many Americans did not report their interest income. Would we need to set up a Form 1099-HSA to report every distribution from HSA accounts? Wouldn’t it be a far better policy to never expose individuals to temptation in the first place?
There are innumerable reasons to eliminate HSAs; this is only one more. Legislation abolishing HSAs can authorize the conversion of existing HSAs
into IRAs. Then we can get on with more noble task of establishing policies that would ensure that everyone has affordable access to comprehensive health care. Then we would have a real basis for respecting ourselves and our national institutions.