Here Are Three Approaches to Allow Seniors to Contribute to an HSA

Many Americans age 65 and older can't contribute to Health Savings Accounts - at a time when they often incur their highest medical spending. But Congress can change the law to expand eligibility.

John Goodman, an economist who has written for more than three decades about medical delivery and coverage, recently wrote an article about elderly abuse. He doesn't address what society usually defines as elderly abuse - acts of fraud, withdrawal of affection, theft, physical assault, neglect - however. Instead, he focuses on ways that government policy damages the elderly financially.

In this context, abuse is a strong word. Perhaps Goodman uses it to grab attention. Nonetheless, his thesis - federal rules that govern medical coverage for seniors leave them worse off than their children and grand-children - is worth considering. Especially when it comes to Health Savings Accounts.

Seniors and Health Savings Accounts

Today, Americans own roughly 32 million Health Savings Accounts with total balances approaching $1 trillion. Owners use these accounts to pay current qualified medical expenses and to save for future coverage and care. Indeed, Health Savings Accounts are the most tax-favorable way to save for medical coverage (premiums) and care (diagnostic services and treatments) in retirement because they are the only account whose contributions and distributions (for qualified expenses) are not taxable.

It's important for working-age Americans to understand the cost of medical care in retirement and, in many cases, to act before they turn age 65. Fidelity estimates that a couple retiring at age 65 in 2021 will spend about $300,000 on medical coverage and care in retirement. That estimate covers Medicare premiums, Medicare out-of-pocket costs (deductibles, coinsurance, and copays) and services not covered by Medicare (like most dental, vision, and hearing goods and services).

Beginning at age 65, many Americans can no longer fund a Health Savings Account, even if they remain active at work and enroll in their company's HSA-qualified medical plan, because they're required to enroll in Medicare. Their eligibility to make and receive contributions to their account is often limited in one of two ways:

Social Security. Working seniors (those who remain active at work after their 65th birthday) who collect Social Security benefits are automatically enrolled in Medicare Part A (which covers inpatient care). They can't disenroll, even if they're covered on their company plan and Part A would provide no additional benefit. Thus, they lose not only their ability to fund their Health Savings Accounts, but also the employer contribution that the company deposits in younger workers' accounts.

Small company. Working seniors employed by companies with fewer than 20 employees are often required by their company's medical insurer to enroll in Medicare Part A and Part B (care delivered outside a hospital, like physician visits, labs, imaging, and therapy) as a condition of remaining covered on the company plan. This isn't a government requirement (as the link between Social Security and Part A is), but many insurers require Medicare enrollment because of government rules around responsibility for paying claims. As a result, they can't contribute or accept an employer deposit.

In the case of Social Security, government policy discriminates against working seniors with lower incomes. In the small-company situation, government policy indirectly drives discrimination against working seniors employed at small companies.

Extending Health Savings Accounts to Seniors

There are three distinct approaches that Congress can take to extend the benefits of Health Savings Account contributions to seniors, whether working or retired:

Decoupling. This option would remove the requirement that only people enrolled in HSA-qualified coverage (and who meet other eligibility criteria) can fund a Health Savings Account. It would open this savings opportunity to all Americans who are enrolled in any medical coverage, including Medicare. This approach would solve the problem because enrollment in Medicare would no longer be disqualifying. It would benefit all Americans, regardless of age.

Rule change. A second approach is to eliminate the conflict between Medicare and Health Savings Accounts. This effort could take one of two forms. The first would be to amend the tax code so that Medicare is no longer disqualifying coverage. The second would be to change the Medicare rule (created by executive authority, not congressional legislation) that requires anyone age 65 or older who receives Social Security benefits to enroll in Medicare. The first approach would fix both the Social Security and small company conflicts. The second would address only the Social Security problem, leaving many working seniors employed at small companies still unable to fund a Health Savings Account.

HSA option in Medicare Advantage. Medicare Advantage is a private alternative to Medicare that currently enrolls about 40% of seniors. (You've probably seen Joe Namath and Jimmy "JJ" Walker hawking this coverage on daytime television, especially during enrollment season.) These plans work like an HMO and are offered by private companies that contract with Medicare. The Medicare Advantage plan is paid a monthly fee by Medicare (including forwarding Part B premiums paid by enrollees) and assumes financial responsibility for patients' claims. It wouldn't be difficult to design a robust Health Savings Account program within Medicare Advantage. Working seniors could enroll in this coverage rather than their employer's plan and start or continue to fund a Health Savings Account.

The Bottom Line

Goodman's column is definitely worth the read, since he discusses other aspects of federal tax law that harm seniors. The issues at the intersection of Medicare and Health Savings Accounts are particularly disturbing because they disproportionately affect seniors who remain in the work force (often not by choice, but rather financial necessity) and collect Social Security benefits to make ends meet or work at a small company that values their contribution. This is a cause that any member of Congress concerned about the elderly (either from sheer humanity or this demographic group's voting power) should embrace.

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