Long before Republican lawmakers unveiled their legislative efforts to repeal and replace the Affordable Care Act, supporters of this movement had talked up “health savings accounts” (HSAs) and how crucial they would be to any eventual Obamacare replacement. What these lawmakers and policy makers often skip over is what an HSA actually is, and whether expanding the use of HSAs will really help most Americans.

HSAs are simple in concept, but much more complex and restricted in execution. For some Americans, they can be a useful supplemental tool, while many others would likely derive limited, if any, benefit from having one. Then there are those who could use an HSA to shelter more of their income from being taxed. So let’s break down HSAs, one point at a time.

What is an HSA?

An HSA is a Health Savings Account, and it’s pretty much what it sounds like: a dedicated, tax-advantaged savings account that you put money into, and can only use for healthcare spending for you and your family.

Tax-advantaged savings are ones that basically don’t count toward your annual income and you pay no taxes on, like how 401(k) retirement savings contributions come out of your pay before your taxes do.

Also like a 401(k), your employer can choose to contribute to your HSA on your behalf, and you’re not taxed on their contributions. Your HSA is also portable — you can keep your account when you leave one employer and move to another, or roll the funds over into a new HSA. And yes, it can be a “safe” investment account.

Can anybody start an HSA? What are the limitations?

Not quite. You’re eligible to create an HSA if you have a high-deductible health insurance plan and if that plan was the only one available to you.

Basically, the idea is that the tax benefit you get from putting your money into a dedicated health spending account offsets the fact that your high deductible may leave you on the hook for large out-of-pocket payments.

For 2017, the IRS has defined “high deductible” as any deductible higher than $1,300 for an individual or $2,600 for a family, so your health insurance plan has to meet that threshold for you to qualify for an HSA.

HSA contributions also have an annual cap. For 2017, the limit on HSA contributions is $3,400 if you have an individual high-deductible health-care plan, or $6,750 if you have one for your family.

If you become ineligible (say, if you change to a lower-deductible health care plan), you can still keep and spend the funds in any existing HSA you have for qualifying medical expenses, but you can’t keep making contributions.

The full (dense, detailed) IRS rules for HSA eligibility and use are here.

Change in the air…

If the GOP replacement bill — dubbed the American Health Care Act (AHCA) — passes as proposed, the limits on annual HSA contributions will become flexible and increase significantly.

Instead of the IRS imposing a hard cap universally, your HSA contribution limit would be equal to your deductible plus your annual limit on out-of-pocket medical expenses. For 2018, that’s at least $6,550 for those with individual high-deductible plans, and $13,100 for family plan holders.

In addition, the AHCA proposes to halve the early withdrawal penalty: Currently, funds you take out of an HSA and use for something other than qualified medical expenses face a 20% tax penalty, if you’re under 65. The bill under consideration proposes dropping that penalty to 10%.

How is an HSA different from a Flexible Spending Account?

You may have read the above description of an HSA and thought to yourself, “Isn’t this the same as a flexible spending account?”

Not quite. HSAs and FSAs are both tax-advantaged, but they differ in some very important ways. First off, the money you put into an HSA is rolls over from one year to the next, while funds put into an FSA are use-it-or-lose-it.

Employers who offer group health insurance plans to their employees can also choose to offer FSAs as a benefit, and employers can choose to contribute on your behalf. (Again, like a 401(k), FSAs are started by employers, not individuals.)

FSAs also have a different structure to their annual cap on contributions: $2,600 per person. So, for example, if both members of a couple have an FSA, that’s a total of up to $5,200 that this family could use.

However, that money must be spent by the end of the calendar year or they are lost. That’s why you’ll see healthcare-related businesses, like opticians, running ads in December encouraging consumers to go use their FSA funds on vision exams and new glasses before the end of the year.

Details about eligibility and disbursements from FSAs are also available from the IRS.

Like HSAs, FSAs, too, are subject to change under any new law: The AHCA proposes eliminating contribution caps on them entirely.

Are HSAs a new thing?

No. Their predecessor, the now-obsolete Medical Savings Accounts, actually came about as part of HIPAA, which was signed into law by President Bill Clinton in 1996.

The transition to HSAs came on Jan. 1, 2004, as a result of the Medicare Modernization Act signed into law by President George W. Bush in Dec. 2003. The accounts were then a repeated policy focus of Bush’s second term, cited many times (in a 2005 speech, or the 2006 and 2007 State of the Union addresses, for example) as a key tool to reduce healthcare costs.

What are the advantages of an HSA? Who does it help?

For individuals and families who have high enough incomes to manage savings and care earnestly about the workings of their taxes, an HSA can be a good choice.

It guarantees you will have a pile of cash set aside for health care costs if and when those costs arrive, which is very helpful.

HSA as Tax Shelter

An HSA can also be used as a tax shelter for people who have disposable income they want to shield from being taxed at the full rate. They can fill up their HSA to the cap each year, reducing their taxable income while also stashing away money that can be used later.

How much later? The funds in an HSA never expire, and if you’re lucky and/or wealthy enough, you may never have occasion to use this money for medical expenses. If you have any unused funds in your HSA when you turn 65, you can use them as retirement savings without penalty.

At that point, you’ve basically turned your HSA into a second 401(k). Once you take the money out to use for retirement, it gets taxed as income, but since you’ll probably be earning less because you’re no longer working, you’ll pay less tax on that money than you would have if it were taxed when you first earned it.

What are the disadvantages of an HSA? Who does it not help?

Supporters of HSAs often fail to point out one obvious rule of personal finance: You can’t save money if you don’t have money to save; a problem that is distressingly common in the U.S.

In 2015, the Federal Reserve released a report [PDF] on Americans’ economic well-being that found that nearly half — 47% — of Americans do not even have access to $400 to cover an emergency. And that problem isn’t solely restricted to low-income households, either; many middle-class Americans also face that financial challenge.

The same report looked at the the relationship between households’ finances and health care expenses. Almost a quarter of respondents to the survey “experienced what they describe as a major unexpected medical expense that they had to pay out of pocket” in the 12-month period before they were surveyed.

Many respondents simply went without medical services because they were too expensive: 31% of those who were surveyed in some way went without care — from dental work, to prescriptions, to specialist follow-ups — because of cost.

As you might guess, that effect is tied closely to household income. Of those who have household incomes higher than $100,000 per year, about 16% went without care due to cost; of those with household incomes under $40,000, that number is 45%.

Choices to seek or avoid healthcare due to cost were tightly correlated with having $400 on hand for an emergency or not, the report adds. Those who can lay their hands on money are more likely to have money to spend on health care. Those who can’t, don’t.

Thus, HSAs may provide an ineffective vehicle to provide coverage to Americans who can’t afford to pay for care.

Or, as John Oliver argued in his recent look at Obamacare repeal efforts, pushing HSAs to folks with no savings is like offering a “very fancy piggy bank” to people who have no money to put in it.

If they’re over a decade old, why am I hearing so much about them now?

Repealing the ACA and replacing it with some other kind of law about health care has been a tentpole of the Republican platform in both Congress and the White House. The plan was kept weirdly secretive for a while but as of March 6, the bill text is now finally public. The two Congressional committees responsible for the legislation recently passed it on to the full House for consideration.

The AHCA proposes a lot of changes to the existing Affordable Care act, both large and small. One of the changes is a vast expansion of the role of the HSA in American health care.

The proposed bill increases the HSA maximum contribution limit, and shifts it away from a hard cap into a more flexible one. HSA limits will now be pegged to the potential cost of care: Your HSA limit is equal to the annual deductible and out-of-pocket expense cap you can incur under a high-deductible health care plan.

That would make the limit “at least” $6,550 for those with individual high-deductible plans and $13,100 for those with family plans, starting in 2018 — possibly much higher, depending on the costs of your particular care.

Starting in 2018, the AHCA also proposes to allow both spouses in a marriage to make “catch up” contributions to that HSA limit, and to allow the funds to be spent retroactively, on health care costs incurred during the 60-day period between starting on a high-deductible health care plan and actually opening the HSA.

I have good insurance through my job. Why should I care?

Employer-based insurance is not immune from changes under the law — and it’s already rapidly shifting toward the high-deductible model.

As our colleagues at Consumer Reports have reported, over the last decade, the percentage of insured Americans who have high-deductible plans has shot up from 5% to 30%.

CR adds that roughly a quarter of all companies that currently offer coverage to their employees only have high-deductible plans. Within three years, it’s estimated that 40% of these employers will only offer coverage with high deductibles.

Additionally, CR data shows that people in high-deductible plans may very well be on the hook for more than they could save through an HSA in a year.

Individuals enrolled in employer-based health plans — all plans, not just high-deductible ones — pay an average deductible of $2,295. Those enrolled in employer-based family plans pay an average deductible of $4,364.

Deductibles run even higher for folks who purchase their insurance on the marketplace exchanges set up by the ACA. Two-thirds of those people are covered under “Silver” plans, which carry an average deductible of $3,572 for individuals and $7,474 for families.

HSA contributions are currently capped at $3,400 for individuals and $6,750 for families — both significantly lower than the average deductible for the self-insured, and lower than a significant percentage of those with employer-based plans, too.

These figures are all based on the current version of the Affordable Care Act. But if the AHCA, or a similar proposal, changes things up, that won’t just alter the marketplace coverage; it could change employer-based plans, too.

By expanding HSA contribution caps to match the sum of your annual deductible and your out-of-pocket limit, the authors of the AHCA are effectively making the argument that you, the consumer, can and should be able to shoulder that burden yourself, entirely through savings you’ve put away. What remains to be seen is whether or not many Americans will be able to save enough of their earnings to take advantage.

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