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There is renewed pressure in Congress to allow Medicare recipients to set aside pre-tax money for medical expenses.
Called the Health Savings for Seniors Act and introduced this month in Parliament, the two-part bill revives previous legislative efforts to allow people at Medicare to contribute to health savings accounts or HSAs, which they are currently unable to do. But with an increasing number of workers using these accounts, more people are likely to reach the age of 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 prior enrollment in Medicare,” said Elizabeth Gavino, founder of Lewin & Gavino and an 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 possibility of using HSA withdrawals to pay for Medicare premiums – something that is currently allowed. It would also eliminate fines for non-medical expenses in the amount of 65 and older, which is now allowed.
By the end of 2021, there were 32 million of these accounts – an increase of 8% from 2020 – by a total of $ 98 billion, according to a recent report by investment consultant Devenir. Annual contributions to HSAs for 2022 are limited to $ 3,650 for a person with individual coverage and $ 7,300 for family coverage. People aged 55 and over can put in an extra $ 1,000 a year.
HSAs come with a triple tax benefit: Contributions are tax deductible, earnings are tax-free, and payments are also tax-free as long as they are used to cover qualified medical expenses. Approximately 28% of workers are enrolled in such a plan, up from 17% in 2011, according to 2021 research from the Kaiser Family Foundation.
However, you can only contribute to an HSA if you have a so-called high-deductible health care plan – and Medicare coverage does not fall into that category. Beneficiaries are allowed to use their HSA funds to pay for medical expenses, but may not create a new HSA or contribute to one.
While people who are still working can sign up for Medicare at age 65, many choose to continue using their employer’s health plan along with Medicare Part A (hospital coverage) and perhaps Part B (outpatient treatment). If it’s a high-deduction plan paired with an HSA, they can only continue to make these pre-tax contributions to the account if they delay signing up for Medicare altogether.
“Many more companies are going for high deductible plans, and many more people are working longer,” said Kathleen Holt, associate director of the Center for Medicare Advocacy. “And they stumble into these rules around HSAs.”
For 2022, a high-deductible health plan is one with a deductible of at least $ 1,400 for one person or $ 2,800 for family coverage, with maximum annual out-of-pocket costs (excluding premiums) of no more than $ 7,050 (for one person)) and $ 14,100 (family plan). It excludes off-network costs.
The Medicare program has something similar to HSAs called medical savings accounts, even though they are not commonly used – about 5,600 recipients were on health plans that used them in 2019, according to the Kaiser Family Foundation.
These so-called MSAs are paired with a high-deductible Medicare Advantage Plan (which some recipients choose), but individuals cannot contribute to the account. The insurance company that offers the scheme provides the contributions – an amount that can vary from year to year – and you can make tax-free withdrawals to cover medical expenses.
In addition, MSA plans do not include Part D prescription drug coverage, according to the Centers for Medicare and Medicaid Services.
It is uncertain whether Parliament’s bill will gain momentum. While the 2019 version of the measure accumulated co-sponsors, it never came out of the committee.