To their detriment, clients often do not consider the impact of healthcare expenses on their retirement plans. These additional costs can impact day-to-day living, gifting actions and estate plans, to name a few issues. Years of diligent investing can be liquidated in a short time frame if a plan is not in place to protect their wealth. H.R. 7435, the Health Savings for Seniors Act, introduced in the House on April 7, 2022 by Ami Bera (D-Calif.) and co-sponsored by Jason Smith (R-Mo.), could ease this stress by allowing Medicare beneficiaries to participate in a Health Savings Account (HSA).
Rep. Bera previously served as chief medical officer for Sacramento Country, California.
No further action is currently listed for the Health Savings for Seniors Act, which was originally introduced in 2019. I’m hopeful that this time it will at least get to a committee hearing.
According to Fidelity Investments, a retired couple should expect to spend around $300,000 in after-tax dollars for healthcare expenses over their lifetimes if both spouses were 65-years-old in 2021. Over a 20-year period, from age 65 to 85, this works out to $15,000 a year for our couple. PricewaterhouseCoopers currently estimates a medical inflation rate of 6.5%, which means future retirees could see costs well in excess of the Fidelity estimate.
It’s not news that company-provided medical coverage for retirees has been in a secular decline for decades. But this reality, combined with the explosion of out-of-pocket medical costs for seniors, has made the cost of healthcare in retirement even more burdensome than was previously projected.
Although your clients on Medicare may not know what healthcare costs they’ll face in retirement or how expensive those costs will be, they’ll be more prepared to help pay for them if they’re able to participate in and contribute to HSAs.
What is an HSA?
HSAs became available in 2003. The legislative intent was to drive behavior to limit the use of medical services. The thought was this: Exposing a taxpayer to the first-dollar cost of a procedure and not having the insurance plan pay until a deductible is met would reduce healthcare usage, ease the burden on the system, encourage healthier lifestyles and lower overall costs for all of the participants. These plans are now the norm; more than half of private sector employees were enrolled in these plans as of 2020.
Eligibility for an HSA
To be eligible for an HSA, an individual or family needs to have a high-deductible health plan (HDHP), with a minimum deductible of $1,400 for an individual or $2,800 for a family. Regardless of their income, taxpayers with an HDHP can make annual tax-deductible contributions to their HSA of up to $3,650 for an individual or $7,300 for a family (plus an additional $1,000 catch-up contribution for people 55 and older, totaling $4,650 individual and $8,300 family). Medicare is presently not considered an HDHP and taxpayers who enroll in Medicare become ineligible to make further contributions to an existing HSA.
But like a lot of things related to taxes, eligibility for an HSA isn’t quite that simple. An outline of the rules can be found in IRS Publication 969. An example of these complications is the “last month” rule. If a taxpayer enrolls in an HDHP by December 1, they can fund a full-year contribution to an HSA provided they maintain eligibility and enrollment for the next twelve months. Failure to do so will mean that a contribution made under this exception will be deemed an excess. The deposit will need to be removed and the accountholder may be taxed and penalized. If a taxpayer enrolls in an HDHP on or after December 2, they can only fund their HSA with a pro-rated contribution for that year.
Examination of the Bill
H.R. 7435 is a rather short bill – just one page. But it has the potential to make significant changes to how health care is funded for retirees. Section 2(a)(2)(G) of this bill allows for those who are enrolled in Medicare to also be considered eligible individuals for HSAs. The fact that the bill has bipartisan support may help provide the traction that is needed to get this legislation passed in an environment where little happens absent a crisis.
However, not everything in the bill is positive for Medicare enrollees: Section 2(a)(4) removes Medicare premiums from the definition of a qualifying medical expense for HSA purposes. This means that enrollees would not be permitted to use their HSAs to pay their Medicare premiums — something they’re allowed to do with their existing HSAs under current law.
The new provision also would remove everyone’s ability to make tax-free withdrawals to pay for Medicare healthcare premiums. There are a few exceptions to Medicare’s age-65 eligibility rule, including younger individuals who are disabled or have end-stage renal failure. But since the majority of people on Medicare are seniors, this would impact that group the most.
The average Social Security check is approximately $1,500 per month and the standard Part B premium is $170 per month (higher depending on income), So Medicare premiums represent a significant expense for many retirees.
How Your Clients Could Benefit
“HSAs would particularly help seniors pay for services such as dental and vision care that is currently not covered under Medicare, leading to a healthier and happier life, and a more dignified retirement,” said Rep. Bera when he introduced the bill.
The reality, though, is that most seniors won’t be able to afford the high-deductible health plans that are required. While the percentage of seniors who will take advantage of this will likely remain small, those that do could have decades to enjoy the benefits. Your clients are more likely than the general population to be among this select group.
Retirees would be able to open HSA accounts at investment firms or local banks. In fact, any institution that can open an IRA could also open an HSA. Medicare enrollees who are still employed would be able to continue to contribute payroll deductions through work.
As an advisor, it’s important to understand the impact that additional savings and subsequent tax-free distributions of earnings for qualified medical expenses can have on clients’ plans should this legislation be passed. If you are managing money for your client, you can add additional value by incorporating investing the HSA balances as part of the overall investment plan. The brokerage account platforms of the custodians will allow you to use the same principles that you do for other registrations.
While H.R. 7435, the Health Savings for Senior Act, certainly deserves credit for starting a discussion about retiree health care expenses, it does not address the needs of those who are currently ineligible for Medicare. Nor does it address the realities that many Medicare enrollees will not have the cash flow to support making contributions and will not have the investment time horizon that will allow them to realize the full benefits of an HSA.
A better legislative step would be to remove the requirement of tying eligibility to an HDHP and allow all taxpayers to take advantage of an HSA. This would benefit not only the originally intended group, those who are Medicare eligible, but also those who are younger and have the time to allow an investment to grow which will help to close the gap in health care funding for future retirees.
John M. Gehri, CFP, ChFC is an advisor with Harvest Financial Advisors in the Cincinnati/West Chester, Ohio area. He may be reached at [email protected]. This article is for informational purposes only. Any commentary and third-party sources are believed to be reliable but Harvest Financial Advisors cannot guarantee their accuracy.