Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
Watch proposed bipartisan changes to the HSA for seniors, called HSSA (Health Savings for Seniors Act), that will ALLOW contributions to the HSA when on Medicare, but DISALLOW (1) Using the HSA for Medicare premiums, (2) Eliminate penalty-free withdrawals after 65 for nonmedical use (the current Triple+ benefit will just become Triple). It revives a similar 2019 proposal that didn't go anywhere.
The current bill is HR 7435, introduced on April 7.
I don't expect this to go anywhere either. That said, IMHO it still has significant flaws.
As I understand it, HSAs were part of a package added to the Medicare expansion act in 2003 (that created Part D) in order to mollify thirteen conservative representatives. Without HSAs, high deductible health plans (HDHPs) leave many people with health coverage in name only - a complaint heard more recently including here about some ACA plans. HSAs make HDHPs, where people have more skin in the game, more palatable.
Medicare does not have high deductibles, nor is it a disliked program. So it doesn't need HSAs to spur participation. And to the extent that people want alternatives, there is already Medicare Advantage. So it seems that the main raisons d'etre for HSAs don't apply.
If the intent is simply to hand seniors who need extra help some money, one could target it better. For example, reduce premiums so that instead of covering 1/4 of costs, they cover 1/5 (that's a 20% reduction). Then increase IRMAA amounts to make up this difference. Revenue neutral, while providing Medicare assistance to those most in need instead of giving tax breaks that most benefit those who need it least.
There's another type of problem with this proposal. AFAIK, the government has not set up a program where people were promised tax-free earnings only to have them later taxed upon withdrawal. It would be as if the government said about Roths: sorry, we're taxing your earnings now.
I could see disallowing tax-free use of HSA contributions and earnings for premiums going forward, but disallowing the tax-free use of past contributions and earnings sets a dangerous precedent.
I know people who would be very upset at Disallowed #2 as they also considered HSA as a supplemental IRA. Some who were sitting on the fence on the HSA were swayed by the allowed nonmedical use of funds after 65. If this proposal becomes serious, there may be some grandfathering exceptions. Or, the Congress may say that allowed nonmedical use after 65 was a defect or loophole in the HSA that had nothing to with the health intent. Afterall, the Congress took away the stretch-IRA for heirs by just saying that it didn't have much to do with the retirement intent of the IRA.
There has to be an escape clause for people putting too much money into HSAs. (Use it or lose it as with FSAs would have made HSAs toxic.) This was always a feature - and always one that came with taxes. Non-medical withdrawals were never triple tax free. The only change being made here is whether a withdrawal penalty is added.
It's not just Congress saying that IRAs were intended for retirement (though Congress did make that clear in its original legislation). It is the Supreme Court saying the same thing as well, in ruling that inherited IRAs are not retirement accounts deserving of bankruptcy protection.
In any case, changes involving stretch IRAs did not make formerly tax-free money taxable. They did affect the timing and arguably size of the tax - a quantitative, not qualitative change. Likewise adding a penalty to non-medical withdrawals from HSAs would not make formerly tax-free money taxable since the non-medical withdrawals were never tax-free.
Just to be clear, my triple+ benefit of current HSA was for i) pre-tax contributions, ii) tax-deferral on earnings, iii) tax-free and penalty-free withdrawals for qualified medical use, and then "+" for penalty-free but taxable withdrawals for nonmedical use after 65. So, this proposal would make triple+ benefit of HSA just triple.
The CNBC columnist (Sara O'Brien) has apparently taken to recycling old(?) material. A "new" column appears today. The only new material I see is a single sentence giving the number of projected HSA accounts at the end of 2024 to be 38M, with assets of $150B.
To add a little new material to this thread, here's a question I have not been able to answer about Medicare premiums being eligible medical expenses:
- An HSA owner may use the HSA to pay qualified medical expenses incurred by one's spouse. So one spouse may take tax free withdrawals from his or her HSA to pay for doctor visits incurred now or in the past by the other spouse (so long as the expenses weren't deducted, paid for out of another HSA, etc.). https://www.irs.gov/publications/p969#en_US_2021_publink1000204083
Now, what happens with Medicare premiums paid by the deceased spouse? Suppose spouse A, deceased, had paid premiums at age 65 (qualified expenses) before the surviving spouse B turned 65?
Had A withdrawn money from the HSA prior to death, the withdrawals would have been tax-free based on the premiums paid. But now that the HSA is owned by spouse B and the same payments were not qualified expenses for spouse B.
Is there an exception that allows the Medicare premiums to be considered qualified expenses for surviving spouse B? Or, what I suspect, does death transform these formerly qualified medicare expenses into unqualified expenses?
It's different if the beneficiary isn't the spouse. Then the estate has a year to take withdrawals as if the deceased were still alive.
Comments
I don't expect this to go anywhere either. That said, IMHO it still has significant flaws.
As I understand it, HSAs were part of a package added to the Medicare expansion act in 2003 (that created Part D) in order to mollify thirteen conservative representatives. Without HSAs, high deductible health plans (HDHPs) leave many people with health coverage in name only - a complaint heard more recently including here about some ACA plans. HSAs make HDHPs, where people have more skin in the game, more palatable.
Medicare does not have high deductibles, nor is it a disliked program. So it doesn't need HSAs to spur participation. And to the extent that people want alternatives, there is already Medicare Advantage. So it seems that the main raisons d'etre for HSAs don't apply.
If the intent is simply to hand seniors who need extra help some money, one could target it better. For example, reduce premiums so that instead of covering 1/4 of costs, they cover 1/5 (that's a 20% reduction). Then increase IRMAA amounts to make up this difference. Revenue neutral, while providing Medicare assistance to those most in need instead of giving tax breaks that most benefit those who need it least.
There's another type of problem with this proposal. AFAIK, the government has not set up a program where people were promised tax-free earnings only to have them later taxed upon withdrawal. It would be as if the government said about Roths: sorry, we're taxing your earnings now.
I could see disallowing tax-free use of HSA contributions and earnings for premiums going forward, but disallowing the tax-free use of past contributions and earnings sets a dangerous precedent.
It's not just Congress saying that IRAs were intended for retirement (though Congress did make that clear in its original legislation). It is the Supreme Court saying the same thing as well, in ruling that inherited IRAs are not retirement accounts deserving of bankruptcy protection.
In any case, changes involving stretch IRAs did not make formerly tax-free money taxable. They did affect the timing and arguably size of the tax - a quantitative, not qualitative change. Likewise adding a penalty to non-medical withdrawals from HSAs would not make formerly tax-free money taxable since the non-medical withdrawals were never tax-free.
https://www.cnbc.com/2022/05/19/you-cant-save-in-hsa-on-medicare-a-bill-to-change-that-has-tradeoffs.html
To add a little new material to this thread, here's a question I have not been able to answer about Medicare premiums being eligible medical expenses:
- An HSA owner may use the HSA to pay qualified medical expenses incurred by one's spouse. So one spouse may take tax free withdrawals from his or her HSA to pay for doctor visits incurred now or in the past by the other spouse (so long as the expenses weren't deducted, paid for out of another HSA, etc.).
https://www.irs.gov/publications/p969#en_US_2021_publink1000204083
- One cannot use an HSA to pay Medicare premiums before one turns age 65. This is a very rigid rule: someone age 62 cannot use an HSA to pay for a 65 year old spouse's Medicare premiums.
https://www.irs.gov/publications/p969#en_US_2021_publink1000204086
- If a spouse is the beneficiary of an HSA, then the HSA become's the spouse's, much as a surviving spouse may elect to treat an inherited IRA as one's own.
https://www.irs.gov/publications/p969#en_US_2021_publink1000204097
Now, what happens with Medicare premiums paid by the deceased spouse? Suppose spouse A, deceased, had paid premiums at age 65 (qualified expenses) before the surviving spouse B turned 65?
Had A withdrawn money from the HSA prior to death, the withdrawals would have been tax-free based on the premiums paid. But now that the HSA is owned by spouse B and the same payments were not qualified expenses for spouse B.
Is there an exception that allows the Medicare premiums to be considered qualified expenses for surviving spouse B? Or, what I suspect, does death transform these formerly qualified medicare expenses into unqualified expenses?
It's different if the beneficiary isn't the spouse. Then the estate has a year to take withdrawals as if the deceased were still alive.