Bill Would Extend HSAs to Seniors, Provide Huge Benefit at Small Cost
by your Health Savings Academy | Originally posted on LinkedIn
A reintroduced bill would expand the Health Savings Account opportunity to seniors.
Seniors represent the largest eligibility gap in the Health Savings Account program. Under current law, the 63 million Americans enrolled in Medicare are automatically disqualified from opening or funding an account. They lose eligibility even if they continue to work and are enrolled in an employer-sponsored HSA-qualified plan. They can't accept an employer contribution to their Health Savings Account, even as the company funds their co-workers' accounts. And they can't deposit a dime of their own money to reduce their taxable income, pay their current expenses, and save to reimburse future qualified services.
Current Law: The Problem
Section 223 of the Internal Revenue Code specifically disqualifies anyone enrolled in any Part of Medicare from opening or funding a Health Savings Account. This restriction is problematic on several levels.
Lower-income working seniors are punished. About half of all seniors begin collecting Social Security benefits before age 65. Under current rules, they're automatically enrolled in Medicare Part A (which covers inpatient, home health, and hospice services) beginning the month that they turn age 65. This rule extends to working seniors, among whom those receiving Social Security benefits are disproportionately lower-income employees who need both their Social Security benefits and paycheck to make ends meet each month. These working seniors can only watch as their better-off contemporaries and younger co-workers continue to (1) receive money from the company to offset their medical expenses, (2) reduce their taxable incomes with pre-tax payroll deductions, and (3) pay their out-of-pocket qualified expenses with pre-tax dollars.
Small-company working seniors are punished. Under the current system, most working seniors at companies with fewer than 20 employees must enroll in Medicare Part A and Part B (which covers outpatient care) as a condition of remaining covered on the company plan. These workers can no longer accept employer contributions or fund their Health Savings Accounts with pre-tax payroll deductions, as their younger colleagues and contemporaries working at larger companies can.
Medicare enrollees pay high out-of-pocket costs. Medicare provides comprehensive coverage, but at a price. That price includes 1 $1,556 deductible for each hospital stay for a new condition (seniors can accumulate several $1,556 bills in a single year), a small ($233) annual Part B deductible and then 20% coinsurance on all outpatient services, and various deductibles, copays, and coinsurance under the Part D prescription-drug program. Unless they established and funded a Health Savings Account prior to enrolling in Medicare, they don't enjoy a discount when paying their out-of-pocket expenses, as Health Savings Account owners do.
Proposed Bill: The Solution
Reps. Ami Bera (D-CA), a physician, and Jason Smith (R-MO) have reintroduced legislation to extend Health Savings Accounts to Medicare enrollees. The Bera-Smith bill addresses the situations described above and creates new opportunities with a simple solution: It redefines Medicare as HSA-qualified coverage. In other words, anyone enrolled in Medicare is eligible to open and fund a Health Savings Account. And anyone who's already contributing to a Health Savings Account won't be disqualified from future funding due to enrollment in Medicare, whether the person is a working senior or retiree.
Under the Bera-Smith bill, working seniors could continue coverage on their employer-sponsored coverage (whether or not it's an HSA-qualified plan) and receive and make contributions to their Health Savings Accounts. They would enjoy this benefit if they're collecting Social Security benefits or work for a small company whose insurer requires them to enroll in Medicare Part A and Part B.
Also, the bill extends the Health Savings Account opportunity to all 63 million Medicare recipients - including those who are enrolled due to disability. These people would enjoy a 15% to 30% discount on the purchase of all qualified services merely by opening a Health Savings Account and funneling money through it to pay medical bills. It's one extra step for them - but a financially powerful one.
Note that this bill isn't law. Like all proposed legislation, it faces long odds of enactment. So, don't go opening a Health Savings Account yet if you're senior enrolled in any Part of Medicare. But be aware that the bill has been proposed. If you like the concept, you can certainly contact your two senators and your representative to express your view.
The Trade-off and Its Impact
The proposed bill isn't costless, however. Congress can't consider legislation until it is scored, that is, the fiscal impact of the legislation is weighed. One of two federal agencies looks at cost in terms of government spending and gain or loss of tax revenue when determining the impact.
To meet the requirements, this legislation takes away two benefits in current law.
Reimpose the penalty for non-qualified distributions. Health Savings Account distributions for non-qualified expenses are included in taxable income and assessed a 20% additional tax as a penalty. The penalty is waived under current law if the account owner is age 65 or older or is disabled. The bill proposes that the additional tax not be waived.
This is a minor financial inconvenience. Most Americans don't accumulate sufficient Health Savings Account balances to pay all their qualified expenses in retirement, so there's no need to spend balances on non-qualified expenses. And even if they do have high balances, they can pass any remaining funds to a beneficiary (or beneficiaries) whom they choose, so their funds aren't lost. This new provision would incent owners to restrict distributions to qualified expenses only, which would lower their tax bills and preserve their balances to reimburse future qualified expenses.
Remove Medicare premiums from the list of qualified expenses. This change would have a greater effect on seniors' finances. Under current rules, Medicare enrollees can pay their Part B premiums ($170.10 monthly for most enrollees) and Part D premiums (vary by plan - the national average is about $35 per month) with pre-tax dollars from their Health Savings Account. That benefit would go away under the proposed law. The combined effect of these two new restrictions is that seniors would have to pay their Medicare premiums from their Social Security check (which is how nearly all seniors pay today) or through withdrawals from their retirement accounts.
This restriction is a take-away - at least on paper. But step back. Few seniors have a Health Savings Account from which they can reimburse premiums with tax-free withdrawals (although the number is growing rapidly, as more account owners reach that age). Again, most seniors don't begin to accumulate sufficient balances to pay all their retiree medical expenses. They simply need to limit Health Savings Account distributions to the vast remaining menu of qualified expenses.