“Retirees who already own an HSA can continue to contribute to their accounts, and those who have never had an opportunity to open an HSA can do so . . This means that 58 million retirees will feel less pressure from the financial vise. And leave them with more funds to receive the high-value care that they need. . .”
William G. Stuart
Director of Strategy and Compliance
July 25, 2019
Regular readers of this blog (see here, here, and here, for example) or my most recent book know that I’m passionate about the intersection of Health Savings Accounts and Medicare. HSA owners age 65 and older may feel as though they’re walking in a dark haunted house, not knowing when the next ghost will pop out to stop them in their tracks. That’s what happens when three distinct programs – HSAs, Medicare, and Social Security – are run by two distinct executive departments – Treasury, and Health and Human Services over age 65 – that write rules and deliver guidance without respect to the effect of one program on another.
But the journey may be a little less scary in the future.
Last week, Reps. Ami Bera, MD (D-CA) and Jason Smith (R-MO) introduced an HSA correction and expansion bill, HR 3796, that eliminates some of the discriminatory practices against working seniors and allows more Americans to own HSAs and enjoy the benefits of HSA ownership longer than they can under current law.
The Legislative Process
Introducing a piece of legislation is the first step in a long process to a bill’s becoming a law. What awaits it: Ways and Means committee hearings and vote, full House vote, assignment to a Senate committee for hearings and vote, full Senate vote, conference committee composed of a handful of members of the House and Senate to reconcile differences in the two chambers’ bills, votes on the new uniform bill by both chambers, and on to the president for his signature.
A companion bill will be introduced in the Senate. I’ve spent time during the past two weeks (including today) meeting with close to a dozen Democrat senators who may be interested in supporting legislation that helps end some discriminatory policies that harm working seniors and allows most Medicare recipients to pay their out-of-pocket costs at a roughly 20% discount.
Believe it or not, there are Democrats who don’t favor a government monopoly on the design, delivery, and financing of medical care, as well as Republicans who aren’t rooting for the Fifth Circuit Court of Appeals to overturn the Affordable Care Act. These elected officials are looking for solutions that build on the current system, irrespective of what may lie in the future. This legislation is an option to address immediate inconsistencies in the treatment of seniors.
HR 3796 addresses three issues at the intersection of Health Savings Accounts and Medicare:
Working Seniors Who Collect Social Security Benefits. Working seniors (age 65 and older) who draw Social Security benefits are automatically enrolled in Medicare Part A (hospital insurance). They can’t waive it or defer Part A when they collect Social Security benefits. All Medicare coverage is disqualifying, so these working seniors who are participating in an employer’s HSA program can no longer accept employer contributions or make personal contributions to their HSAs. This holds true even if they don’t receive any benefits from Part A.
Working Seniors Employed at Small Companies. Working seniors who are employed at companies with fewer than 20 employees are often required by the group medical plan to enroll in Part A and Part B as a condition of remaining covered on the group plan. If they’re participating in the employer’s HSA program, they can’t continue to receive an employer contribution or personal contributions to reduce their taxable incomes.
Retirees with Fixed Incomes and High Medical Expenses. Today’s retirees are increasingly caught in a financial vise that often tightens with each passing year. They live on fixed incomes, generally far less than what they earned during their working years. Their medical needs are often greater than when they were younger, and their Medicare coverage imposes high out-of-pocket costs. As medical care consumes more and more of their personal budget, they are more likely to forego care and medications for chronic conditions or compromise on shelter or food.
HR 3796 addresses these issues. A key provision states that Medicare is HSA-qualified coverage. This approach makes inherent sense, since Part A (inpatient coverage) has a deductible of $1,368 per benefit period (and patients can have more than one benefit period in a single year). The statutory minimum annual deductible for HSA-qualified self-only coverage is $1,350 in 2019 (rising to $1,400 in 2020). Although Part B (outpatient services) and Part D (prescription-drug coverage) begins to pay benefits before this threshold, a typical Medicare recipient pays more than $4,000 annually in out-of-pocket costs (excluding premiums).
How does this change in Medicare from disqualifying to HSA-qualified coverage affect each of the groups above?
Working seniors who collect Social Security benefits and are automatically enrolled in Part A can continue to receive an employer contribution to their HSAs and can keep depositing personal funds (through pre-tax payroll deductions or tax-deductible personal contributions). These contributions reduce their taxable incomes and can be used either to pay current expenses at an average 25% to 30% discount (the effect of tax savings) or to pay future expenses with similar discounts. The bill puts older employees who earn low pay on par with their colleagues – young and old – who earn more than they.
Working seniors at small companies whose insurers require them to enroll in Part A and Part B can also continue to receive employer contributions and make personal deposits into their HSAs. They can thus enjoy all the contribution benefits of an HSA that employees at larger companies receive.
Retirees who already own an HSA can continue to contribute to their accounts, and those who have never had an opportunity to open an HSA can do so and begin to make personal contributions (up to $4,500 this year and $4,550 in 2020) to reduce their taxable incomes and pay their out-of-pocket expenses at a roughly 20% discount. This means that 58 million retirees will feel less pressure from the financial vise. And leave them with more funds to receive the high-value care that they need or eat more nutritious but costlier meals to maintain or enhance their health.
The Price and the Opportunity
Under congressional budget rules, elected representatives can’t enact this bill without finding a pay for – some combination of tax increases or spending cuts that offset the cost of lost tax revenue. That price is dependent on the score (measure of the cost of a bill) by one of two federal agencies. The score is a critical factor in the success or failure of any legislation.
Legislation drafters are keenly aware of this fact and often incorporate some offsetting revenue or reductions in other aspects of a particular program to minimize the net impact of the legislation on the federal budget. For example, the authors of the Affordable Care Act (ACA) included the Cadillac Tax, the medical-device tax, and the Health Insurance Tax as revenue-raisers in that bill. And they limited Health FSA elections, required prescriptions for tax-free distributions from Health FSAs and HSAs to pay for over-the-counter drugs and medicine, and increased the additional tax for non-qualified distributions from an HSA from 10% to 20%.
The key provision in this bill to minimize the net impact on the federal budget states that Medicare premiums are no longer HSA-qualified expenses. Today, HSA owners can reimburse their monthly Part B ($135.50 for most enrollees) and Part D (average $35) premiums from their HSA. With an average premium cost of about $2,000 annually, the typical senior with an HSA balance can save about $600 (since she would have to withdraw about $2,600 from a traditional 401(k) plan to pay taxes on that withdrawal and net about $2,000 to pay for premiums).
Is this price reasonable? That question will be hotly debated within the HSA industry and among HSA owners – particularly those in or nearing retirement age who funded their HSAs with the current rules in mind.
I think that it is. Here’s my reasoning:
1. More tax savings. HSA owners can continue to contribute to their HSAs for another 10 or 20 or even 30 years beyond the current limit (which, in practical terms, today is age 70 – the point at which people derive no additional benefit by deferring collecting Social Security and being enrolled in disqualifying Part A coverage). Thus, for every year that seniors lose the $600 or so tax benefit from reimbursing their Medicare premiums, they reduce their taxable income by about $1,000 if they make the full $4,500 contribution. That’s an attractive trade-off, in my mind.
2. Longer lasting balances. When HSA owners can contribute more, they buy qualified services at a discount for longer. Imagine someone who retires at age 65 with a $50,000 HSA balance, which earns 3% annually. He distributes $4,000 in the first year – a figure that increases by 7% annually to reflect medical inflation and increased services. She exhausts her HSA balance at age 76. In contrast, if she contributes $4,500 at age 65 (a figure that we project to increase by $50 annually) to pay at least a portion of her current expenses, she doesn’t exhaust her balances until age 86. That’s an additional 10 years of buying care at a discount.
The major criticism of this bill is likely to be that it benefits the rich because only people with $4,500 of extra income can afford to contribute to the maximum in their HSAs. This criticism completely misses the mark. Medicare retirees have, on average, more than $4,000 annually in out-of-pocket expenses. They’re responsible for paying their doctors, hospitals, pharmacists, and outpatient therapists that much money each year. HSA contributions don’t represent an additional cost. Rather, Medicare recipients merely need to contribute the funds that they use to pay for their services into their HSAs, then pay providers from the HSA. This extra step brings an immediate 20% (average) discount to each bill through tax savings.
Giving all seniors a tool to help them pay their medical bills and avoid delaying high-value care for chronic conditions should be a priority to all members of Congress.
What We’re Reading
How much will you spend on medical care in retirement/ The most common figure, an annual estimate by Fidelity®, is $285,000 for a couple retiring at age 65 in 2019. But other organizations also publish their projections, and they’re usually – gulp – higher, like perhaps $390,000.
Under new Trump Administration guidance, the definition of select preventive care that can be covered below the deductible on an HSA-qualified plan is expanded to include some low-cost, high-value services related to monitoring and treatment of chronic conditions. Read more here.
A House Republican has introduced legislation to establish Health Freedom Accounts (HFAs), an enhanced form of HSAs with more flexibility and recognition of the growing role of direct-primary care relationships.