A Better Idea: Let Workers Use HSAs to Save for Sick Days | Health Policy Blog

Bad Idea: Mandating Sick Pay. To some, mandating paid sick days may sound benevolent, but it would hurt the people it’s intended to help…

…Obama also appears ignorant of the fact that his own health adviser, Jonathan Gruber, published academic research back in the 1990s showing workers themselves wind up paying the cost of mandatory benefits through lower wages. Thus, if employers are forced to provide seven paid sick days for each worker every year, employers will adjust workers’ pay downward to compensate for the cost. This would inhibit pay raises, and it would impact paid vacation days.

Mandating paid sick leave could even harm the employment prospects of workers most likely to stay home and care for a sick child. Gruber has also published research that found specific groups who are the intended beneficiaries of mandated benefits may suffer discrimination by employers hoping to avoid the costly mandate. That suggests low-income, single mothers with small children may find their job prospects lower under a mandate allowing them to take seven days off with pay each year to care for not only themselves, but also their sick children. Moreover, forcing employers to provide seven days of sick leave would likely result in not only pay reductions, but possibly cause employers to reclassify vacation days as merely paid time off for illness or leisure.

What is the solution? The president should have called for expanding Health Savings Accounts (HSAs) to all workers, allowing them to set aside funds for all sorts of medical needs. In addition, the president could have also proposed allowing workers to use HSAs to replace income lost to sick days.

If workers themselves tend to pay their own benefits — why not give workers themselves the tools to manage the trade-off between wages and replacement income lost to sick days? Currently, those workers who have HSAs could withdraw funds from their accounts to replace income lost due to sick days (or buy a boat for that matter). However, this would be considered a “non-medical use” of the HSA and would expose the worker to a stiff penalty of 20 percent, plus ordinary income taxes. Prior to the Affordable Care Act, the penalty for non-medical use was only 10 percent — plus ordinary income tax.

Allowing workers to set aside funds in an HSA to replace income lost to sick days would allow workers themselves to set aside fund in case of need, and then reclaim those funds for nonmedical purposes in the event a sick day wasn’t used. How would this work? Under current law, seniors are allowed to convert their HSAs into retirement income (without penalty) by paying ordinarily income tax on the funds withdrawn. A senior withdrawing HSA funds for retirement expenses does not face the 20 percent additional penalty for non-medical use. It certainly makes sense to allow workers forced to take a few days off due to illness each year the same courtesy.