Even though over the past 11 years I have been promoting to all who will listen, the value of building up a Health Savings Account HSA reserve balance, until recently I missed an important point about how withdrawals from HSAs reduce retirement income that may avoid Medicare Part B premium surcharges. And why, with a healthy HSA balance you may choose to select a Medicare Medical Savings Account MSA plan as a retiree.
In 2003 President George W. Bush signed into law the creation of HSAs, Part D prescription coverage for retirees, along with increases in Medicare Part B and Part D premium responsibility, tiered based upon personal income two years prior. Where are those Medicare premium thresholds now? If you are single earning $87,000 or less per year then your annual Medicare Part B premium is $1,735.20. If married filing jointly with income of $174,000 or less, the premium for your spouse and you is $3,470.40; double the single amount.
Let’s say though that your single income is a penny over $87,000 because you are paying for Medicare Part B with after-tax retirement funds. Or possibly your income is $174,001 if married filing jointly. The way the law works your Medicare Part B premium cost increases an additional $840 per year if single or $1,680 for two of you. This equates to a 48% annual premium surcharge to $2,575.20 if single or $5,150.40 inclusive of your spouse.
There are three additional premium surcharge thresholds that can result in up charges for Medicare Parts B and D peaking at almost 300% more than the base premium. Annual premium climbs to as high as $5,080.80 if single and $10,161.60 for two retired spouses with very high income.
What if though you entered into retirement with $100,000 or more in your HSA? That balance is able to pay your Medicare premium costs for many years without increasing your taxable income, possibly avoiding subjecting you to a Medicare premium surcharge. This scenario exists as withdrawals from an HSA are not taxed as income if used to pay for Medicare Part B and D premiums and other qualified health care expenses.
HSA funds post-retirement can also pay for Medicare Advantage premium costs, but not Medicare supplement or Medigap premiums. And you can spend HSA funds on non premium out of pocket health care expenses that also qualify when using a Flexible Spending Account FSA. The ability to withdraw funds from your HSA this way increases non-taxed retirement spending opportunities.
In addition, with a generous balance in your HSA you have a reserve of funds allowing you to consider signing up for $0 premium Medicare Advantage plans that include higher of pocket risk. Such plans include a Medicare Medical Savings Account MSA Plan.
MSA plans for retirees are similar to HSA plans for working individuals. In 2020, Medicare will deposit $3,240 into an MSA for you and there are insurers out there offerings these plans for $0 premium per year. The rub is that the annual deductible can be as high as $9,400 per person, or $6,160 net once MSA funds are used up. And yet like an HSA, unused MSA funds rollover to the next year and are owned by the individual.
As a “reasonable risk” acceptance person, when I find my way to retirement, these positives will lessen concern about paying Medicare Part B and D surcharges, plus allow me to avoid paying much or even anything for a Medicare Advantage plan. My HSA happily sits at $85,000 now and I have up to 10 years of additional eligibility to add funds to it while allowing the HSA to grow in value by investing in mutual funds.
This is, of course, assuming I keep working full time until I am age 70, retain creditable health insurance coverage, avoid raiding the HSA along with waiting to sign up for Social Security plus Medicare Parts A, B, and D until then. And yes, we can all do this without penalty post-retirement if we keep working and have creditable health coverage.
Sounds like a good plan assuming excitement about work continues in addition to good health. Back to the elliptical!