How to Make HSAs Better Retirement Accounts

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“Congress . . . can’t continue a policy that discriminates against employees who earn lower wages.”

William G. (Bill) Stuart

Director of Strategy and Compliance

March 21, 2019

When I tell people about my soon-to-be-released book, HSAs: The Tax-Perfect Retirement Account, I’m sometimes asked what changes I’d like to see in HSA rules to make these accounts even more attractive and powerful for owners.

The Hatch-Rubio-Paulsen bill, introduced in the 115th Congress, contained a lot of good (and, in my opinion, a few not-so-good) proposals to expand HSAs. Republicans in the House of Representatives used the bill as the basis for a number of HSA expansion bills that ultimately were consolidated into two pieces of legislation (see text here and here) that the lower chamber passed with bipartisan votes in July 2018. Unfortunately, those bills died when the Senate (despite two sponsors in the upper chamber) didn’t take action on the bills.

Here are the changes in the law that I thing would be most helpful to the growing number of Americans (and their financial advisors) who understand the role that HSAs can play in retirement:

Higher contribution limits: Many HSA supporters would like to see HSA contribution limits increased from the statutory maximum annual contribution (currently $3,500 for self-only and $7,000 for family coverage). This change would roughly double the annual contribution limit.

This change would allow serious savers to increase their balances in the only tax-perfect account to which they have access. It would also help owners covered by small-group and nongroup plans. Because insurers can’t price these products to reflect risk, they have increased cost-sharing dramatically by raising both deductibles and introducing or increasing coinsurance. This change in the law would allow more high-claim individuals to reduce their net out-of-pocket responsibility.

This concept hasn’t advanced in the legislative process because of the projected budget impact. But traditional models overestimate the cost by (1) assuming that every HSA owner today contributes up to the current maximum and (2) HSA owners would contribute to the new higher limit. The assumptions simply aren’t an accurate representation of behavior.

Repeal (or make optional) the Part A retroactive coverage provision: Working seniors who delay enrollment in Medicare because they remain covered on a group plan face a problem when they finally enroll in Medicare. Their Part A coverage is automatically effective six months retroactively. Can you think of another form of insurance that provides six months of coverage at no cost to enrollees?

As a result of this provision, working seniors can’t make or accept contributions to their HSAs for the last six months of their pre-Medicare enrollment. In 2019, that means a loss of $4,000 in contributions (half the $7,000 family maximum and half the $1,000 catch-up contributions), or $2,250 for someone with self-only coverage. And if the retroactive coverage spills into the prior calendar year, they may have to file an amended tax return to reflect properly their maximum contribution.

At a minimum, HSA owners should have the option of waiving this retroactive coverage.

I’m trying to put this issue on members of Congress’ radar screens.

Part A as disqualifying coverage: I’m not a big fan of negative discrimination. And here’s a classic example: You and I are both age 68 and work at a large department store. We’re both enrolled on family coverage with a $3,000 deductible. The company contributes $1,500 to each eligible employee’s HSA.

You’re the general manager and earn $95,000 annually. You’ve delayed enrollment in Social Security. You accept the employer contribution and make additional pre-tax payroll deductions to reduce your taxable income. That’s how the program works for younger employees as well.

I earn only $24,000 as a part-time clerk in the men’s department. I supplement my low pay by collecting Social Security benefits. Under current law, I must enroll in Medicare Part A, even though I’m quite happy remaining enrolled on the group plan. My Part A enrollment disqualifies me, so I can’t receive a dime of employer contributions and can’t reduce my taxable income by making pre-tax payroll contributions.

The House corrected this problem in one of the 2016 HSA expansion bills (HR 6311, Sec. 3), but the legislation died in the Senate.

Either Congress needs to allow Medicare-eligible seniors to opt out of all Parts of Medicare or it needs to allow those who are forced under current law to enroll in Part A when they receive Social Security benefits to remain eligible to make and receive HSA contributions. It can’t continue a policy that discriminates against employees who earn lower wages.

Part B as disqualifying coverage: Here’s another form of discrimination. You’re still the department-store manager making $95,000. Your twin brother also makes $95,000 working for a small accounting firm. Because his company has fewer than 20 employees, Medicare offers to be the primary coverage for anyone who enrolls. And his company’s insurer requires him to enroll in Part A and Part B to remain covered on the company plan (as many, but not all, insurers do). It does so to reduce its claims exposure, since your brother’s enrollment in Medicare moves his employer’s plan to secondary coverage.

So, you and your brother are the same age, make the same income, and are both enrolled in an HSA-qualified plan with a $3,000 family deductible. But you can make or receive up to $8,000 in contributions to your HSA. And your brother? Because he’s forced to enroll in Part A and Part B, he can’t accept en employer contribution to offset his deductible or make contribution on his own.

I’ve pleaded my case on both the Part A and the Part A/Part B discrimination issues to officials in the Trump administration and congressional staff members. They’re politely receptive. The president included in his proposed budget the provision to allow Part A enrollees to remain HSA-eligible. And members of Congress and their staff members understand the issue and are generally supportive. But many still don’t understand the small-company issue, and those that do are concerned about the effect of a policy change on Medicare. (The proposal that I support would actually reduce Medicare spending by making the employee – not Medicare – the primary payer until the employer-sponsored plan deductible is satisfied.

Robust HSA option in Medicare Advantage: It seems wasteful to reward patients for a decade or more by encouraging them to make prudent diagnostic and treatment decisions, then promptly shutting the door on the opportunity to enjoy tax benefits and effectively tell them not to ask any more questions about alternative treatments, the cost of care at different sites of service, and the cost-effectiveness of services.

But that’s what we do with seniors who enroll in Medicare. Sure, they can enroll in a Medicare Savings Account, but that’s a watered-down version of HSAs. The government contributes a portion of the deductible to an MSA. Enrollees can’t make additional contributions to reduce their taxable income and pay for qualified services beyond the government contribution with pre-tax dollars.

We should be encouraging seniors to remain discriminating (in the good sense of the word) shoppers for medical care. These small actions, repeated millions of times annually, will reduce Medicare expenditures. And allowing these seniors to make personal tax-deductible contributions will increase their financial security. Isn’t that a laudable federal goal?

HSA/401(k) employer contribution coordination: Few people are talking about this issue, and it’s new to most members of Congress. But what if Congress passed legislation allowing employers to offer employees a pool of matching money and permitting employees to determine where the money goes. For example, an employer promises to match 50% of employee contributions to a 401(k) (or comparable workplace-based retirement plan) or an HSA. The employee decides how much of the match he wants to go into his HSA and his qualified retirement plan. This option would allow employees to direct employer contributions into the account that they believe will be most helpful to them.

Under current law, this practice would run afoul of both retirement-plan and HSA contribution rules that require employees to give the same contributions to similarly-situated employees.

What We’re Reading (or Watching)

Whoopi Goldberg, HSA spokeswoman? Not exactly. Bu the actress, who contracted near-fatal pneumonia, reflects on how she hasn’t gotten her money’s worth during years of paying for medical insurance. She has understanding of how insurance works. But her question – Why doesn’t the money roll over if I don’t use it? – is the perfect battle cry for HSA adoption. She could have rolled over a portion of her premiums and (you’ll understand if you listen to the three-and-a-half-minute clip, which you should) buy the DME device that her insurer won’t cover.

Side note: Don’t you find it strange that the same people who think they’re “paying for nothing” when their portion of premiums exceeds their claims in a given year aren’t lamenting that they didn’t crash their car to get their money’s worth from the auto insurance? Or that they’re discouraged when basement flooding doesn’t destroy their basement furniture and lifetime of memories in photo albums stored there?

Only 43% of employers understand the role of HSAs as retirement accounts, according to a recent survey. My fellow benefits professionals and advisors, we still have a lot of work to do!

But when prompted, more than three-quarters of employers want to speak to an advisor about programs that help employees increase retirement savings.

Those of you who are professional benefits advisors have an incredible business opportunity – to help employers and employees understand that an HSA isn’t just a more flexible Health FSA, but rather a financial account in which owners can build medical equity to stretch their savings dollars to pay for qualified medical, dental, vision, and premium expenses in retirement.

2 thoughts on “How to Make HSAs Better Retirement Accounts”

  1. Dennis P Stebbins says:

    Wish I could understand all of this are we talking about retirement contribution or health saving plans at retirement

    1. Bill Stuart says:

      The column talks about how Congress can improve retirees’ lives by changing laws to allow more people to contribute more money to their HSAs during their working years – both their pre-65 and (as is increasingly common today) post-65 working years. Increasing the statutory maximum annual contribution would help pre-65 workers who want to sve mroe for retirement medical costs and also aid people – particularly those covered by ACA marketplace plans – who face very high out-of-pocket costs. The other proposals would eliminate some discriminatory effects of conflicting policies that affect only working seniors who are enrolled in HSA-qualified coverage and want to continue to make and receive contributions to their HSAs.

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