Mixmedia | E+ | Getty Images
There is new pressure in Congress to let Medicare beneficiaries set aside pre-tax money for medical expenses.
Called the Health Savings for Seniors Act and introduced this month in the House, the bipartisan bill revives past legislative efforts to allow people on Medicare to contribute to health savings accounts, or HSA, which they currently cannot do. Still, with growing numbers of workers using these accounts, more people are likely to reach age 65 — the time you become eligible for Medicare — with an HSA in tow.
“Many customers who have established HSA accounts believe they can continue to fund HSA after enrolling in Medicare,” said Elizabeth Gavino, founder of Lewin & Gavino and independent broker and general agent for Medicare plans. “They’re usually surprised to find out they can’t.”
The bill comes with a trade-off: It would remove the ability to use HSA withdrawals to pay Medicare premiums, which is currently allowed. It would also eliminate penalty-free withdrawals for non-medical expenses in the 65-and-over crowd, as is now permitted.
At the end of 2021, there were 32 million such accounts — up 8% from 2020 — holding a total of $98 billion, according to a recent report by investment consultant Becoming. Annual HSA contributions for 2022 are limited to $3,650 for an individual with single coverage and $7,300 for family coverage. People aged 55 or over can invest an additional $1,000 per year.
HSAs come with a triple tax benefit: contributions are tax-deductible, earnings are tax-exempt, and withdrawals are also tax-free as long as they are used to cover eligible medical expenses. About 28% of workers are enrolled in such a plan, up from 17% in 2011, according to a 2021 study by the Kaiser Family Foundation.
However, you can only contribute to an HSA if you have a so-called high-deductible healthcare plan — and Medicare coverage doesn’t fall into that category. Beneficiaries are allowed to use their HSA funds to pay for medical expenses, but cannot set up or contribute to a new HSA.
While people who are still working can enroll in Medicare at age 65, many choose to continue using their employer’s health plan alongside Medicare Part A (hospital coverage) and, perhaps, Part B (outpatient care). ). If it’s a high-deductible plan with an HSA, they can only continue to make those pre-tax contributions to the account if they completely delay Medicare enrollment.
“A lot more companies are moving to high-deductible plans, and a lot more people are working longer hours,” said Kathleen Holt, associate director of the Center for Medicare Advocacy. “And they come across these rules about HSAs.”
For 2022, a high-deductible health plan is a plan with a deductible of at least $1,400 for an individual or $2,800 for family coverage, with maximum annual disbursements (not including premiums) not exceeding 7 $050 (for an individual) and $14,100 (family plan). This excludes off-grid costs.
The Medicare program has something similar to HSAs, called Medical Savings Accounts, though they’re not widely used — about 5,600 beneficiaries were in health plans using them in 2019, according to the Kaiser Family Foundation.
These so-called MSAs come with a high-deductible Medicare Advantage plan (which some beneficiaries choose), but individuals cannot contribute to the account. The insurer that sponsors the plan pays the premiums — an amount that can vary from year to year — and you can make tax-free withdrawals to cover medical expenses.
Also, MSA plans do not include Part D prescription drug coverage, according to the Centers for Medicare and Medicaid Services.
It is not certain that the House bill will gain momentum. While the 2019 version of the measure racked up co-sponsors, it never left the committee.