Expanding HSAs to Seniors: Why Medicare Beneficiaries Shouldn’t Miss Out on Health Savings Accounts 

Under current rules, Medicare beneficiaries are prohibited from contributing to a Health Savings Account (HSA). Apparently, the government doesn’t think that seniors should have access to the same tax-advantaged savings vehicle that everyone else gets.

It’s a shame, too. Considering how badly Medicare beneficiaries need help paying for things like vision, dental, and prescriptions (the things not covered by Medicare) you think they’d be at the top of the list when it comes to HSA eligibility.  

But last month, new legislation was introduced that would expand HSA access to Medicare enrollees. If passed, this bill would go a long way towards righting a grievous wrong. But on the other hand, it isn’t a perfect bill, either, and would change some things.

Here’s what you need to know about the new legislation and the potential implications for Medicare beneficiaries.

H.R. 3796 – The Health Savings for Seniors Act

On April 7th, 2022, DC Representatives Jason Smith (R-MO) and Ami Bera, M.D. (D-CA) introduced H.R. 3796. Known as the Health Savings for Seniors Act, the proposed legislation would let people continue to contribute to their HSA after they enroll in Medicare.

It would also allow Medicare beneficiaries to open new HSAs, even if they’ve never had one before.

“The federal government should make it easier – not harder – for older Americans to access healthcare,” Representative Smith says in the press release. “The threat of rising inflation underscores the need to give seniors more flexibility with how and when they can pay for their out-of-pocket health care expenses.”

But giving HSA eligibility to seniors and Medicare enrollees is only the headline. H.R. 3796, if passed in its current form, would also:

• Re-impose the 20% tax penalty for non-qualified distributions for seniors – Currently, this penalty is waived for anyone who is 65 or older.
• Remove Medicare premiums as an HSA-qualified expense – Currently, HSA account holders can use pre-tax HSA funds to pay for the Part B and Part D premiums.

What are the Implications?

Without a doubt, giving HSAs to seniors is a good idea. But H.R. 3796 wouldn’t come without some side effects.

Firstly, the bill reinstates the 20% tax-penalty for non-qualified withdrawals, even for seniors. For most people, this really isn’t that big of a deal. With the average cost of healthcare in retirement hovering between $300,000 and $400,000 for a couple, there will be plenty of HSA-qualified expenses to come.

Medicare enrollees would simply have to be more intentional about their HSA distributions. This, I think, could actually turn out to be a benefit for many, as it could lead to lower tax bills and less out-of-pocket liability later in life.

The bill would also mean that HSA holders pay for their Medicare Part B premium through a Social Security deduction. This is how the vast majority of Medicare enrollees are doing it now, and it’s seemed to work so far.

Using Your HSA Skills in Retirement

Over the last few years, Health Savings Accounts have exploded in popularity. With the added pressure from inflation, more Americans than ever are looking for new ways to save money on healthcare.

By making the regular maximum HSA contribution and staying healthy, account holders can create a significant amount of wealth to use healthcare. But why should 65 be the cutoff? Especially when we’re living much longer than we used to?

Like most bills coming out of congress, H.R. 3796 has a long way to go before ever becoming law. But HSA holders don’t need to wait to get the most out of their HSA funds during retirement.

Here’s what to keep in mind:

1.   Don’t Use HSA Funds Until You Need Them. Unlike 401(k)s and other retirement accounts, HSAs have no requirements in terms of minimum contribution or age limit. Keep your HSA cash where it can continue to grow!
2.   Consider Market Fluctuations. Just like any other investment asset, timing is everything with HSA distributions. Your account could gain or lose value over time, and you don’t want to be “selling” your HSA assets at a loss.

Stay Tuned for More News About Medicare Consumer Freedom

We’ll let you know if there are any updates about H.R. 3796. Or for that matter, any other state or federal legislation that could affect your healthcare freedom, for good or ill.

In the mean-time, stay tuned to the MediGap Advisors blog for ongoing content, written and curated by our very own in-house Medicare experts.

To your health and wealth,

Wiley P. Long, III
President – MediGap Advisors