Personal Finance

Bill to improve health savings accounts for Medicare users comes with a big downside

Key Points
  • Current law requires you to stop contributing to a health savings account once you sign up for Medicare.
  • The Health Savings for Seniors Act would allow you to put money in those tax-advantaged accounts even after you sign up for the government insurance program.
  • However, you would not be able to use any of the money to cover Medicare premiums and you'd pay a penalty if you were to use withdrawals for non-qualified medical expenses.

A new bill in Congress aims to give older Americans a tax break for setting aside money for medical expenses, a strategy many give up when they reach age 65.

There would be a trade-off, however.

Called the Health Savings for Seniors Act and introduced by Reps. Ami Bera, D-Calif., and Jason Smith, R-Mo., the bill would allow Medicare beneficiaries to contribute money to health savings accounts, or HSAs. Under current law, once a person signs up for Medicare — eligibility is at age 65 — they must stop putting money in those tax-advantaged accounts.

At the same time, though, the bill explicitly removes the ability to use HSA withdrawals to pay for Medicare premiums — something that's currently allowed. It also would eliminate penalty-free withdrawals for non-medical expenses in the 65-and-older crowd as now permitted, according to people familiar with the bill.

A patient is monitored in an examination room inside the Clinical Decision Unit at Kaiser Permanente's Capitol Hill Medical Center in Washington, D.C.
Brooks Kraft LLC | Corbis | Getty Images

With a growing number of workers using HSAs, more people are likely to reach age 65 — the point at which you become eligible for Medicare — with an HSA in tow.

"Allowing seniors the choice to have a health savings account will help them pay for the out-of-pocket costs Medicare doesn't cover — like dental, vision and hearing expenses — and allows them to do so with pre-tax dollars," said Kevin McKechnie, executive director of the American Bankers Association's Health Savings Accounts Council, which supports the bill.

These accounts come with a triple tax benefit: Contributions are tax-deductible, earnings are tax-free and withdrawals also are untaxed as long as they are used to cover qualified medical expenses.

Here's how to get the most tax benefits out of a health savings account
Here's how to get the most tax benefits out of a health savings account

You can only contribute to an HSA if you have a so-called high-deductible health-care plan. Enrollment in such options in 2017 was somewhere between 21.4 million and 33.7 million policyholders and their dependents, according to the latest estimates from the Employee Benefits Research Institute. The number of HSAs stands at roughly 22.2 million.

Annual contributions to HSAs for 2019 are limited to $3,500 for someone with individual coverage and $7,000 for family coverage. People age 55 or older can put an extra $1,000 in per year.

While people who are still working can sign up for Medicare at age 65, many choose to continue using their employer's health plan if that remains an option. If that's a high-deductible plan paired with an HSA, they can only continue making contributions to the account if they delay signing up for Medicare altogether.

For 2019, a high-deductible health plan is one with a deductible of at least $1,350 for an individual and $2,700 for a family, with maximum annual out-of-pocket costs (not counting premiums) of no more than $6,750 and $13,500, respectively. That excludes out-of-network costs.

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In comparison, basic Medicare comes with a $1,364 deductible for Part A (hospital coverage) per benefit period and a $185 deductible for Part B, which covers outpatient care and medical equipment. And, there are no out-of-pocket maximums for either.

For many older Americans, health-care costs can be a pricey line item in their budget. A 65-year-old male-female couple retiring today will pay an estimated $285,000 in medical costs over the rest of their lives, according to Fidelity Investments. That amount excludes expenses associated with long-term care (daily help with basic living).

Roughly 52.2 million Americans age 65 or older are on Medicare. Another 8 million or so beneficiaries are younger people with disabilities.

While the ranks of people with an HSA are growing, just 18% of all adults with employer health-care coverage report being in a high-deductible plan that's paired with an HSA, according to a recent Kaiser Family Foundation survey.

Roughly half (47%) say they contributed less than $1,000 to their account in the past 12 months and 11% put in more than $5,000. Among households with incomes under $75,000 that have an HSA, 72% say they contributed less than $1,000 in the last year and 3% put in at least $5,000.

Additionally, 68% say they use their account to pay for current medical bills, while 32% say it's a way to save money for the future, the Kaiser survey shows.

Meanwhile, this isn't the first congressional effort to change the rules for HSAs and Medicare. In the last Congress, a bill was introduced that would have allowed people with an existing HSA to continue contributing once on Medicare. The current bill would do the same, along with allowing Medicare beneficiaries to open an HSA if they don't already have one.

"This would expand coverage choices and provide greater affordability to our nation's seniors," said McKechnie of the bankers association.

It's uncertain whether the new bill will gain any traction in the House.

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