Medicare Rules and HSA’s

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Medical symbol with sunriseThe rise of high-deductible employer health plans has created one of the most unpleasant surprises for older employees. 

Anyone on Medicare is no longer allowed to make tax-free contributions to a health savings account (HSA).

In 2003, Congress authorized HSAs as part of the law that also brought Part D drug plans into existence. HSAs are only available to those with a high-deductible health plan.

The beauty of an HSA is that it is funded with pre-tax dollars and its holdings can be invested, like a 401(k). When spent, any earnings on these investments are exempt from income taxes, like a Roth IRA, so long as the expenditures are for qualifying medical expenses. Unlike flexible spending accounts, HSA contributions do not have to be spent by the end of each year but can be carried over indefinitely.

There are minimum deductions needed for a health plan to qualify as high-deductible, and they may change each year. For 2018, plans must have an annual deductible of at least $1,350 if they cover individuals, and $2,700 for families. Further, such plans may not generate out-of-pocket expenses that exceed $6,650 for individual plans and $13,300 for family coverage. These expenses, the IRS says, include plan “deductibles, co-payments, and other amounts, but not premiums.”

The annual maximum on these contributions in 2018 will be $3,450 for HSAs linked to individual insurance plans, and $6,900 for family plans. In addition, $1,000 age-related “catch up” contributions are permitted for those aged 55 or older. This raises the total limits of plan contributions to as much as $8,900. Employers often contribute the rest of these funds. And, contributions to a plan can come from family and friends as well as the insured individuals.

While most HSAs are linked with employer insurance plans, any qualifying high-deductible plan can permit the insured person or family to open an HSA. This includes private health plans through financial institutions. 

Medicare and Social Security enter the HSA picture because Medicare insurance is not a high-deductible health plan. Anyone with Medicare, or coverage from other health plans that do not offer qualifying high deductibles, may not contribute to an HSA. A person can continue to use any assets within an existing HSA account.

Most common questions:

Why does receiving Social Security prohibit a person from contributing to an HSA?

The law requires anyone aged 65 or older who is receiving any type of Social Security benefit to also be enrolled in premium-free Medicare Part A, which covers hospital expenses. This triggers the Medicare-related ban on HSA contributions. Historically, enrolling in Medicare Part A was a very good thing. It can be used as secondary insurance for people covered by employer health plans with no premiums. The rise of high-deductible health plans can make Medicare Part A a dubious benefit. Unfortunately, the only way to reject Medicare Part A is to withdraw from receiving Social Security benefits.

Why does Medicare Part A take effect six months before an individual’s requested effective date? And, how does a person know when to stop HSA contributions?

The earliest that a non-disabled person can enroll in Medicare is age 65. If enrolling in Medicare within six months prior to turning 65, Medicare Part A will start on the first of the month when turning 65. If enrolling in Medicare after turning 65, a person is entitled to as many as six months of retroactive benefits, but in no case can the effective date be earlier than when turning 65.

Historically, people were better off with these retroactive benefit dates. Clearly, that may not be the case when it conflicts with an HSA. 

People who claim Social Security benefits before they turn 65 are too young to qualify for Medicare Part A. Claiming Social Security does not always interfere with an HSA – only if a person is 65 or older.

If a person knows they are going to become ineligible for HSA contributions during a calendar year, can they “front load” that year’s allowable contributions before becoming ineligible?

No. It’s important to remember that contributions to an HSA are calculated monthly. For example, if someone with family coverage had $6,900 in allowable HSA contributions, the rules “credit” one-twelfth of that amount each month, or $575.

Normally, it would not matter if the person made all those contributions in January, for example, because the rules assume they would qualify for HSA contributions for the entire year. But if they became ineligible in July, they would only be able to contribute $3,450 (six $575 monthly contributions).

What happens to any excess contributions?

They need to be removed from the HSA and treated as taxable income on the annual tax return. These rules are explained, albeit not always clearly, in IRS Publication 969

What happens to the employer’s contributions?

The employer has made a commitment to contribute, for example, $1,500 for the year to the employee’s HSA. It is legal for the employer to contribute a full annual contribution. In this example, for a period of six months, the employee’s allowed contributions would be $1,950 in addition to the employer’s $1,500 contribution.

It is the responsibility of the employee to make sure there are no excess contributions. If there are, it’s the responsibility of the employee to correct it before filing that year’s tax return. If the employer does not have knowledge of the employee becoming ineligible for additional HSA contributions, there is no reason why the employer’s contribution should terminate.

What if a person has family coverage and one family member becomes ineligible?

If one spouse becomes ineligible, the full amount of that year’s family HSA contributions normally can be made by the eligible spouse. The $6,900 can be contributed in any way the couple prefers. If the ineligible spouse was making a $1,000 catch-up contribution, this would no longer be allowed.

One important requirement is that if the employee is the person who begins Medicare and becomes ineligible, the spouse must have established their own HSA in order to complete the couple’s allowable contributions.

Is there was a family HSA for people with family health coverage?

There are no joint HSAs. Each spouse must have their own HSA if they wish to make tax-free contributions. This most often happens where the non-employee spouse wishes to make an age-related catch-up contribution of $1,000. That contribution can only be placed in their HSA account. Employers usually do not create such accounts, so the non-employer spouse needs to work with a financial firm to establish the account. There are ongoing efforts to revise HSA laws and eliminate the need for non-employee spouses to create separate HSAs for their catch-up contributions.

If an employer offers only the high-deductible plan, what can a person do if they are ineligible for an HSA?

If a person wants employer health insurance, they will need to accept the likelihood that out-of-pocket expenses could be substantial without HSA funds.

People with Medicare Part A should take a close look at whether it makes sense for them to reject their employer’s health plan and, instead, purchase Medicare Part B and other Medicare coverage, including a Medicare Part D drug plan with an optional Medigap supplement plan or a Medicare Advantage plan. 

If ineligible, how does this affect income taxes?

If a person has made excess contributions and can withdraw them by the time income taxes are due, there will not be a penalty due to the IRS. Otherwise, the penalty is 6 percent.

What tax forms should be used?

Form 8889 is used for reporting your annual HSA activity. Form 5329 is used to report excess contributions. If using a tax preparer, work with them on how to file these forms.

 

 

Companies Quietly Change Your Health Plans

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images-1A very quiet but profound shift is fundamentally reshaping how the Affordable Care Act health insurance program works for roughly 155 million employed Americans who receive coverage through their employers. 

A national survey of employer health benefits released in September 2016 shows how much deductibles — the health care costs that people must pay out of their own pockets before insurance kicks in — have increased. In 2016, 4 in 5 workers had a deductible as part of their individual coverage, averaging $1,478. During the past five years, deductibles have grown 10 times as fast as inflation and nearly six times as fast as wages, according to the new report.

For the first time, employer-sponsored health plans also reached a new benchmark: Half of all workers who receive insurance through their employers faced a deductible of at least $1,000 a year for individual coverage — up from just 10 percent of workers in 2006, according to the survey by the Kaiser Family Foundation and Health Research & Educational Trust. The average deductible for individuals in firms with fewer than 200 employees is $2,069.

“We’ve been so fixated on the Affordable Care Act, we’ve missed a gradual sea change in what health insurance is for most Americans,” said Drew Altman, president of the Kaiser Family Foundation. “It’s why, if we were ever to tell an average person that we’re living in a period of historic moderation in health care costs, they would probably think we’re out of our minds — because what they pay out of pocket has been going up over time… and that’s kind of the pain index for people.”

The Affordable Care Act included a cap on out-of-pocket spending for plans sold through the marketplaces and on the employer market. There has been a furor over the premium hikes and the stability of the marketplaces, where roughly 11 million Americans receive coverage. But far less attention has been paid to how deductibles are shaping the spending — and health — of the large number of Americans with employer-based insurance.

Reining in health care expenditures has become a major issue for large and small employers. The Kaiser data shows that while premium increases have moderated — with family premiums growing an average of three percent last year — many employers have increased their use of high-deductible plans, and the deductibles themselves have also skyrocketed. The effect of those high deductibles is mediated in some plans by employer contributions to health savings accounts. For example, once the employer contributions are taken into account, the proportion of workers facing at least a $1,000 deductible for single coverage drops from half to 38 percent.

Tom Delaney, senior manager of benefits for Epiq Systems, a Kansas City, Kansas-based firm that provides software engineering and development for the legal industry, said that in 2014 the company introduced a high-deductible plan alongside its more traditional offering. The new plan has an individual deductible of $1,500, with an out-of-pocket maximum of $3,000, and he said that more than a third of the company’s roughly 1,500 U.S. employees switched over — more than expected.

The appeal is that the employee’s share of the premiums are less for this plan — about $145 a month versus $200 a month on the more traditional option. But the company also wanted to incentivize employees to stay well. Epiq Systems, therefore, offers a $50 monthly discount to people in both plans if they participate in a wellness program that rewards people who take actions such as completing an on-site health screening, a coaching call with a nurse practitioner to review health history and a health risk assessment. Delaney said about two-thirds of the employees participate in the wellness program, which has been offered for three years.

“I actually think the bigger picture is learning how to be better consumers and better purchasers of health care,” he said, “just like when we go to the store, you look for the best sales, the best deals, the best quality — and you put that all together in terms of how we access health care.”

What do these new plans mean?

A separate study released earlier in 2016 found a markedly different pattern of health-care use between people on high-deductible plans, compared with traditional plans. That study by the Health Care Cost Institute, a nonprofit research organization, examined insurance-claims data from people covered by employer-sponsored insurance plans between 2010 and 2014. Over that five-year period, people on the high-deductible plans, also called consumer-driven health plans, used 10 percent fewer health-care services. But despite using fewer medical services overall, they personally paid more out-of-pocket costs each year. People on the high-deductible plans spent an average of $1,030 out of pocket on health care versus $687 by people in more traditional plans.

The idea behind these high-deductible plans is what economists call “skin in the game.” The hope is that people will cut back on unnecessary care if they are on the hook for more of the costs. But it’s unclear whether the deductibles simply prompt people to cut back on care across the board or to eliminate truly unnecessary tests, doctor visits and medication.

“In terms of watching for the future, I think we can see this lower utilization trend,”  said Amanda Frost, a senior researcher at the Health Care Cost Institute. “But given how new all of this is — the new prevalence of these plans, the newly identified reduction-in-service-use trend — I think it’s going to be interesting to watch and see what the health implications of this are.”

What employers are grappling with is how to rein in spending, which is increasing both for employers and employees. One way to do that is to shift some of the cost to employees.

 

At Civitan International, a Birmingham, Alabama, nonprofit that operates civic clubs aimed at helping individuals with disabilities, health-care costs have more than doubled over the past decade, according to Tom Stoves, director of finance. Every year, the board of the small, 15-person firm debates whether and how much of that cost to pass on to its employees.

About three or four years ago, Stoves said, Civitan shifted the balance so that employees paid 20 percent of the premium, instead of just 6 percent. He noted the plan is still quite generous compared with many other plans in the area; the monthly premium for an individual is $106.

Stoves said that the deductible rose 10 percent this past year, to $2,000 for an individual plan in 2016. To help defray the costs of that deductible, the company offers a supplemental benefit to people once they have paid the first $500 of their deductibles, allowing them to receive up to $750 toward deductible payments.

Health care “is definitely growing, and it’s growing faster than some of our other line items of expenses,” Stoves said. “Our board is pretty appreciative of the employee that we have … and they want to provide this benefit as long as they can. For the employees, it’s a good morale boost to have reasonable health-care costs.”