Talking Points Memo Opposing HSA Substantiation


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To: Coalition Members and Opinion Leaders

From: Dan Perrin

Re: Talking Points Against HSA Substantiation


Date: April 8, 2008

1) The markup on the bill containing HSA substantiation is scheduled for 11:00 AM Wednesday, April 9.

2) The following talking points can be used when talking to members of Congress and their staff:

  • The current IRS procedures for tracking HSA expenditures are more than sufficient and burdensome enough. The Financial Institutions file the 1099 SA to report distributions, the 5498 SA to report contributions received and fair market value. The employers file W-2s which contain specific Health Savings Account contribution information, and the accountholder files the 8889 form for self reporting contributions and distributions. The data correlated from these forms should match – otherwise there would be a potential issue for audit. Compared to the simple self-reporting for charitable giving and Section 173 qualification, the HSA is one of the most scrutinized tax savings vehicles available to the average person.

  • Our whole tax system is based upon self-reporting. HSAs suffer much more scrutiny that tip reporting and self-employment wage reporting. Evolution’s arguments that the IRS has no way to audit HSA spending are completely spurious – there are far more lucrative areas for the IRS to put resources to if that was truly the issue.

  • There are no real restrictions in how to spend HSA funds. If a person spends HSA funds on non-qualified expenses, they pay 10% additional tax, in the same way one can take an early IRA distribution. Given the scrutiny described above, the HSA should be less susceptible to abuse than an IRA.

  • The HSA is an individually owned account. The Flexible Spending Account is an employer group owned account. Substantiation serves the interest of the employer, who has to pay for the technology to be able to offer the FSA. The trade off is that they get to keep any money that the employee sets aside in the FSA but doesn’t use, so the employees unwittingly pay for this technology to the benefit of companies like Evolution Benefits, out of the money set aside for medical care which they do not use. The individual loses all the benefits, including future medical care, under the FSA model with its substantiation requirement. The unused funds in an HSA accrue for future health care and retirement expenses of the accountholder.

  • Substantiation will add enormous costs to the HSA. These costs will be borne in the end by the consumer. The whole purpose of the consumer directed healthcare concept was to remove unnecessary overhead from the healthcare process. Studies show that this is exactly what has been occurring. Adding this requirement will require banks to become claims administrators – aside from the fact that most banks are not un this business, it simply shifts the costs of healthcare administration that already exist to other vendors, such as Evolution Benefits.

  • Evolutions own card does not contain merchant code restrictions, thus the card can be used anywhere for any purpose. The leading HSA administrators do use merchant code restrictions – one purpose is to try to train individuals to use the account for healthcare related purposes and prevent their unintended use for non-qualified expenses – the other is to prevent non-qualified use of the card since the HSA is a limited purpose account. Purchases at an electronics store for example are in all likelihood not only non-qualified, but in many cases they are an indication of cards and ID theft. The Financial institutions do scrutinize HSA transactions. Their tax reporting burden, and the burden of correction of incorrect tax filings align the interests of the bank and accountholder to present the IRS with timely and accurate tax reporting the first time.

  • Requiring substantiation will in effect amount to a restraint of trade. If banks are required to substantiate HSA expenses, there are only a handful of banks with the infrastructure or resources to build such substantiation engines. Because most community banks and credit unions simply do not have the resources to put such costly technology into production, they would have to buy from vendors and pass on the cost to their accountholders – raising the price of HSA administration with no real benefit to the IRS or anyone else save one.

  • If Evolution’s intent was as its CEO Patricelli claims, to just have the Financial Institutions report substantiated and non-substantiated expenses, most would just choose to report all as unsubstantiated. However his proposed language asks for mandatory third party substantiation. This is only proposed so that Evolution can be the “substantiator.”

  • Evolution Benefits received a patent on a substantiation process in 2007. Should they convince you to pass this legislation their next move would likely be to file suit against competitors to enforce their patent and attempt corner the market on HSA substantiation. Congress would become unwitting participants in the creation of a monopoly the expense of their respective constituents, both individual and corporate, not to mention the extinction level event it will cause HSAs.

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