On February 4, 2016, Sen. Orrin Hatch (R-UT) and Rep. Erik Paulsen (R-MN) introduced legislation (click on the bill numbers for the legislative language and other pertinent information: S. 2499 / H.R. 4469) that the HSA industry considers the “gold standard” for changes to the HSA program. This is the third in a series of posts summarizing the provisions of the bill that I will post in the coming weeks. Look for my future posts.
Sec. 202 – Provisions Relating to Medicare
This section includes two provisions related to Medicare. The first provision addresses the increasingly common issue of Medicare enrollment and the conflict it creates with HSA eligibility. The second provision would help make Medicare Medical Savings Accounts (MSAs) work more like HSAs.
Regarding the first provision, current HSA law prohibits individuals enrolled in any part of Medicare from HSA eligibility. This means they cannot continue to make contributions to their HSA for any month following their enrollment in Medicare. In the year someone enrolls in Medicare, they will likely have to pro-rate their HSA contribution (including catch-up contribution) for the year if their Medicare enrollment is effective any day other than January 1. If their Medicare enrollment begins January 1, they will be ineligible to contribute to their HSA for the entire year.
The most common part of Medicare that people enroll in is Medicare Part A (the part that covers inpatient hospital stays and related services). For most people, Part A is free (i.e., no premium) and comes automatically around the time you turn age 65. But Medicare Part A has its own deductible of $1,288 (for 2016). Even worse, the deductible is not a calendar year deductible but a “per benefit period” deductible, which means someone could pay the deductible more than once if they are hospitalized several times during the year.
Since the deductible is so close to the minimum deductible for HSA-qualified plans, it makes sense to allow people who are enrolled only in Medicare Part A to maintain their HSA eligibility. But the law needs to be change to allow them to do so, and that’s what this provision does. If the law is not changed, some people would have to give up their Social Security benefits as this is the only way they can avoid enrollment in Medicare Part A.
The second provision would allow Medicare beneficiaries covered by Medicare MSA plans through the Medicare Advantage program to contribute their own money to their MSAs, which are similar to HSAs. MSA plans are health plans with high deductibles that allow beneficiaries to receive tax-free contributions from the federal government to their MSA. However, the government contribution is significantly lower than the plan deductible, and the beneficiary may not contribute any of their own money to fill in the gap. This provision would allow beneficiaries enrolled in Medicare MSA plans to contribute their own tax-deductible money to their MSAs to cover the annual shortfall.