How the Bera-Smith Bill Would Help Seniors
by William G. (Bill) Stuart, Director of Strategy and Compliance at Benefit Strategies
Executive Summary
Under current law, anyone enrolled in any part of Medicare is disqualified from making or receiving contributions to a Health Savings Account. This provision hurts working seniors with lower incomes and those working for small companies (who typically are lower-paid). These working seniors can’t even accept the tax-free contribution that their employers give to their younger co-workers. And retirees, whether or not they participated in a Health Savings Account program prior to enrolling in Medicare, can no longer make contributions to their accounts.
Here are three distinct examples of how current Social Security and Medicare rules discriminate against certain working seniors:
Scenario 1: Lower-income working seniors who receive Social Security benefits to supplement their incomes can’t make or receive from their employer a contribution to a Health Savings Account. This discrimination occurs because Social Security recipients are forced to enroll in Medicare, even when they’re covered on an employer-sponsored plan and neither want nor benefit from Medicare coverage. Even when an employer makes a generous contribution to all employees’ Health Savings Accounts to offset deductible expenses, these working seniors can’t accept the deposit, thus increasing the net out-of-pocket costs for a company’s lowest-paid employees.
Scenario 2: Most working seniors in companies with fewer than 20 employees are required to enroll in Medicare as a condition of remaining covered on their employer-sponsored plan. Current rules discriminate against them, since they can’t make or receive from their employer a contribution to a Health Savings account. Their co-workers under age 65 can receive an employer contribution and reduce their taxable incomes, but they can’t, regardless of their income or out-of-pocket expenses.
Scenario 3: Medicare enrollees pay an average of $5400, which places most traditional Medicare enrollees’ out-of-pocket costs above the statutory minimum annual deductible for an HSA-qualified plan. Yet America’s seniors, many living on low fixed incomes, can’t stretch their medical budgets as working Americans can with a Health Savings Account.
In each scenario, distinct groups of seniors are treated differently under the tax code, due to their income, the size of their companies, or their status as retirees.
The Health Savings for Seniors Act
In July 2019, Rep. Ami Bera (D-CA), a physician, and Rep. Justin Smith (R-MO), introduced HR 3796, the Health Savings for Seniors Act. This bill addresses all three scenarios above by designating Medicare as HSA-qualified coverage. Thus, anyone enrolled in Medicare would be deemed to be eligible to make and receive contributions to a Health Savings Account.
The bill makes two additional changes in current law to offset the lost tax revenue that remains in seniors’ budget. First, the bill doesn’t allow account owners to make pre-tax distributions to pay their applicable Medicare Part B, Part D, and Part C premiums. Although this provision may seem like a take-away, seniors don’t lose their balances. The net effect is to preserve Health Savings Account balances longer into retirement to reimburse tax-free qualified medical, prescription-drug, dental, vision, and over-the-counter expenses.
Second, under current law, account owners who make withdrawals for non-qualified expenses must include the distribution in their taxable income. In addition, unless they’re over age 65 or disabled, they pay an additional 20% tax as a penalty. HR 3796 would impose the 20% additional tax on all distributions for non-qualified expenses, irrespective of the account owner’ sage. This provision increases the likelihood that distributions are made for their intended purpose and preserves balance for tax- and penalty-free distribution for future qualified expenses.
Detailed Scenarios
Here are three common scenarios in which passage of HR 3796 would eliminate discrimination against specific segments of America’s senior population:
Scenario 1: Working Seniors Collecting Social Security Benefits
Situation: Amanda and Becky both age 67 and work for the same large company. Both are enrolled in an HSA-qualified plan with a $2,500 deductible, of which the employer pays $1,500 annually in a lump-sum contribution to employees’ Health Savings Accounts.
Amanda is a manager earning $54,000 annually and has deferred enrollment in Social Security to increase her monthly benefit. Becky is a receptionist earning $26,000 per year. She enrolled in Social Security at age 64 to supplement her earned income. She was automatically enrolled in Medicare Part A at age 65 because, under current rules written in Social Security’s Program Operations Manual System (POMS), she collects Social Security benefits. (See POMS Section HI 00801.002, “Individuals entitled to monthly benefits which confer eligibility for HI (note: HI is Hospital Insurance, also referred to as Part A of Medicare), may not waive HI entitlement. The only way to avoid HI entitlement is through withdrawal of the monthly benefit application. Withdrawal requires repayment of all RSDI (note: Retirement, Survivors, Disability Income, also referred to as Social Security benefits) and HI benefit payments made.”)
Implication: Amanda is eligible to make or receive contributions to her Health Savings Account. She receives $1,500 from her employer and contributes an additional $3,050 herself, saving $1,068 in taxes (35% rate). Her employer contribution and tax savings more than cover her $2,500 deductible.
Becky can’t receive the employer contribution, nor can she direct pre-tax payroll deductions into her account. If she meets her deductible, she has to spend nearly 10% of her gross salary ($2,500 of $26,000, or 9.6%) on medical expenses.
She’ll probably cancel her group plan, enroll in other Parts of Medicare, and shift all her claims costs from a private insurer to Medicare.
Note: (1) 22% federal income, 7.65% federal payroll, 5.35% state taxes for a total of 35%
How HR 3796 Would Address this Inequity: Becky wouldn’t by penalized by losing out on her employer’s $1,500 contribution. And she wouldn’t lose a tax deduction. Instead, she’d save $763 in taxes. That combination would cover 91% of her deductible – not as much as Amanda, who’s in a higher tax bracket and therefore enjoys additional tax savings.
Scenario 2: Working Seniors at a Small Company
Scenario: Chuck and Dave are both 67-year-old CPAs. Both earn $87,000 annually. Both are enrolled in their respective companies’ HSA-qualified medical plans with a $2,500 deductible. Both employers contribute $1,500 in an annual lump sum to all employees’ Health Savings Accounts.
Chuck works for a large national accounting firm. Dave is employed at a local firm with 10 employees.
Implication: Chuck isn’t enrolled in Medicare. He collects the company’s $1,500 contribution and contributes another $3,050 to his account, saving $1,000 in taxes. He covers his entire deductible with the employer contribution and his personal tax savings.
Dave works for a company with fewer than 20 employees, so under federal law, Medicare is his primary payer. His employer’s insurer requires employees to enroll in Medicare Part A or Part B as a condition of remaining enrolled on the group plan. Insurers don’t have to require enrollment in Medicare, but most do so that another party – Medicare – assumes primary responsibility for paying claims. Because he’s enrolled in Medicare, Dave can’t accept the $1,500 employer contribution, nor can he reduce his taxable income with his own contributions. He must pay the full $2,500 deductible with after-tax dollars.
He'll probably disenroll from group coverage altogether and use Medicare as his sole coverage. This action won’t shift claims responsibility, since Medicare is the primary payer anyway.
Note: (1) 22% federal income, 7.65% federal payroll, 5.35% state taxes for a total of 35%
How HR 3796 Would Address this Inequity: Dave wouldn’t lose his $1,500 employer contribution or pay $1,068 more than Chuck on his additional $3,050 of taxable income. Instead, he would enjoy the same benefits from an HSA program as would his fellow employees and Chuck.
Scenario 3: Retirees
Scenario: Elaine and Frank are neighbors in a retirement village. Both draw $17,000 in Social Security benefits and need to withdraw an additional $28,000 from other accounts to meet their annual budget. Elaine worked for a company that offered a Health Savings Account, and she accumulated a $37,000 balance when she retired three years ago at age 66. Frank, also age 69, never worked for a company that offered this benefit before he retired a decade ago. Both are healthier than the average Medicare enrollee and pay about $3,400 annually in out-of-pocket expenses (in addition to about $4,000 in annual premiums for Part B, Part D, and a Medicare supplement plan).
Implication: Elaine pays her $3,400 of qualified expenses (premiums and cost-sharing) from her Health Savings Account. Distributions aren’t included in her taxable income, so her withdrawals don’t affect the percentage of her Social Security check that’s taxed, nor does it potentially affect her Part B premium.
Frank pays his $3,400 of expenses from his traditional 401(k) plan. His withdrawals are included in his taxable income. This higher taxable income increases the percentage of his $17,000 annual Social Security benefit that’s taxable from 50% ($8,500) to 85% ($14,450). As a result of his higher taxable income and higher percentage of his Social Security benefit taxes, he pays $1,622 more than Elaine.
Notes:
Provisional income is equal to 50% of your Social Security benefit plus other income, such as pensions and distributions from retirement accounts. See IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits.
Provisional income determines how much of your Social Security benefit is taxed. For taxpayers with filing status of single or head of household with provisional income between $25,000 and $34,000, 50% of their Social Security benefit is taxed. For incomes above $34,000, 85% of the Social Security benefit is taxed.
12% federal income tax and 5.35% state income tax. No payroll taxes applied to this income.
Additional note: This scenario doesn’t depict the Income-Related Monthly Adjustment Amount, or IRMAA. Medicare enrollees with incomes above $87,000 ($174,000 if filing jointly) pay a higher Part B premium. Health Savings Account distributions aren’t included in the income calculation that triggers IRMAA, whereas distributions from traditional retirement accounts do count toward the threshold.
How HR 3796 Would Address this Inequity: Frank would be able to contribute $3,400 from either his Social Security benefit or via distribution from his traditional 401(k) plan to his Health Savings Account. The resulting tax benefits would save him $1,622 annually in taxes.
How HR 3796 Would Address this Inequity: Frank couldn’t go back in time, but he could open a Health Savings Account for the first time and withdraw up to $4,550 (20202 figure) from his 401(k) plan and deposit it into his Health Savings Account. In our scenario, he contributes $3,400, which allows him to keep another $590. And if that contribution reduced his income enough so that only 50% of his Social Security benefit were taxed, he’d save an additional $1,032. His total tax savings would be $1,622, giving him an extra $135 per month for pay for prescription drugs, food, heating/cooling, travel, or entertainment.
Elaine wouldn’t be able to pay her Medicare premiums with tax-free distributions from her Health Savings Account, as Health Savings Account owners do now, due to a pay-for provision in HR 3796. Her tax bill would be about $694 higher each year. But she’d preserve $4,000 in account balances to make tax-free distributions later in life, whereas she would exhaust her balance in about six years (versus more than 10 years if she can’t reimburse premiums tax-free).
Summary
Bera-Smith would help tens of millions of seniors – retired and working – manage their medical expenses and tax situations.
Working seniors could join their younger colleagues by fully participating in their companies’ Health Savings Account programs, receiving employer contributions and reducing their taxable incomes with pre-tax salary deductions. (Scenario 1)
Working seniors at s mall companies could enjoy the same Health Savings Account benefit as their younger colleagues and fellow working seniors employed at larger companies.
And retirees could begin (or continue) to contribute to their accounts, thereby reducing their tax burden, increasing their spendable income, and reducing the likelihood that they defer necessary medical care or outlive their savings.