How Total-Replacement HSA Companies Can Help Their Medicare-enrolled Employees

Some working seniors can't open or fund a Health Savings Account. This concept allows employers to help them manage their financial responsibility.

Companies that consolidate their medical plans into a single HSA-qualified offering must consider the effect of this change on their working seniors (employees age 65 and older). Some of them may not be able to take full advantage of the Health Savings Account opportunity that their younger coworkers can access.

The Compliance Issue

Individuals enrolled in any Part of Medicare are disqualified from opening (if they don't already have one) or funding a Health Savings Account. This provision affects two groups of working seniors:

Small-company employees: Insurers can require that Medicare-eligible employees in companies with 19 or fewer employees enroll in Medicare Part A and Part B if they want to remain covered on the company's medical plan. In companies this size, Medicare is the primary payer, which means that Medicare is required to process claims submitted on behalf of those enrollees. Most (but not all) insurers require working seniors to enroll in Part A and Part B so that the insurer is responsible for only the portion of the claim that Medicare doesn't pay (up to plan limits). Employees can't appeal this insurer policy.

Example: Catielle works for Jake's Cakes, a baker that employs six workers. When she turns age 65, her insurer requires her to enroll in Part A and Part B. Catielle undergoes a hip replacement with a Medicare allowable charge of $35,000. Medicare pays the bill, less the $1,632 Part A deductible. The hospital then submits the Medicare Explanation of Payment and the claim to the group plan. She met her $2,000 deductible earlier in the year, so her insurer pays 80% of her remaining bill, or $1,305.60. She pays the hospital the $294.40 balance.

Employees who are required to enroll in Part A and Part B must consider whether they're better off financially paying a monthly Part B premium ($174.70, or more with a higher income) and also their share of the employer-sponsored plan premium. The decision will be based on their share of the group premium, the group plan benefits and depth of its network, the pharmacy benefit, and whether they're also covering other family members (like a spouse who's not yet Medicare-eligible).

Social Security recipients: Working seniors who collect Social Security benefits are automatically enrolled in Part A and Part B when they're Medicare-eligible (age 65, or later if they delay receiving Social Security benefits). They can decline Part B coverage to avoid the monthly premium, but they're locked into Part A coverage, with no appeal process.

Solving the Issue

If the company offers only an HSA-qualified medical plan, how can it help working seniors enrolled in Medicare to cover their out-of-pocket expenses as it does with, say, a $1,000 or $2,000 Health Savings Account contribution to employees who are HSA-eligible?

The simple, effective solution: Offer a Health Reimbursement Arrangement integrated with the medical plan to either just Medicare enrollees or all employees who aren't HSA-eligible (for example, a younger worker whose spouse's participation in his company's general Health FSA disqualifies her).

A Health Reimbursement Arrangement is a notional account that operates like an IOU. The company promises to reimburse eligible expenses up to a certain amount annually. The company can design the plan (like the reimbursement amount, eligible expenses, whether the employee or the HRA pays the first dollars of eligible expenses, whether unused balances carry over into the next year). For example, in the example above, Jake's Cakes could integrate a $1,000 HRA into the medical plan for each employee who's not HSA-eligible.

The Limitations of an HRA

An HRA isn't as attractive to a worker as a Health Savings Account is. An employer's Health Savings Account contribution is made in cash and becomes the employee's property immediately. Employees who don't have immediate claims to pay retain their balances to reimburse future claims - whether they receive that care next month, next year, or decades hence.

In contrast, HRA funds are owned by the company and are distributed when a covered employee incurs a qualified expense during the plan year. Employers can design the HRA so that unused balances carry over into the following year's HRA or roll over into a retirement HRA that employees can access after they leave the company. But the funds never become the property of the employee.

Also, Health Savings Account owners can distribute balances tax-free to pay for qualified medical, dental, and vision expenses, plus some premiums. Employers can't restrict reimbursement to a subset of these permitted expenses. In contrast, employers define the range of expenses that HRA funds can reimburse, usually limiting the list to services applied to the medical-plan deductible.

These limitations aside, offering an HRA at least places working seniors enrolled in Medicare on equal footing with their HSA-eligible counterparts for reimbursement of current expenses.

Example: Mickey's Mini Mart, a convenience store, offers workers an HSA-qualified plan with a $3,000 self-only deductible. The company contributes $1,250 to each eligible employee's Health Savings account and a $1,250 HRA to employees who aren't HSA-eligible. Walt is age 67 and not enrolled in Medicare. He receives a $1,250 company contribution to his Health Savings Account. He incurs $700 of claims, which he reimburses from his account, leaving him with the $550 balance of the company contribution to spend on future claims. Roy, also age 67, is enrolled in Medicare. He also incurs $700 in claims. His HRA reimburses those expenses. He doesn't own the remaining $550 value of his HRA. If his employer permits a carryover into the following year, he can spend the balance then. If not, he can't access the $550. But in both cases, employer funds, flowing into two different types of accounts, paid 100% of their qualified expenses that year.

Doubling Up

An employer can offer both a Health Savings Account contribution and an HRA to all employees if the HRA is designed properly.

Example: Whispering Pines Academy, an iconic Maine boarding school, sponsors an HSA-qualified medical plan with a $5,000 self-only and $10,000 family deductible. It offers a Post-Deductible HRA that covers the final $3,000 (self-only) and $$6,000 (family) of the deductible. It then contributes $2,000/$4,000 to HSA-eligible faculty and staff members, leaving them with a net deductible of $1,000 or $2,000. It sponsors a second HRA for faculty and staff who aren't HSA-eligible, covering the first $2,000 or $4,000 of their deductible expenses. Voila? They too are responsible for only $1,000 or $2,000 of net deductible expenses.

When employers offer the HRA option to non-HSA-eligible employees, no worker can be offered the choice of either a Health Savings Account contribution or an HRA. Participation in the HRA that substitutes for the Health Savings Account contribution must be limited to employees who are not HSA-eligible. Employers must be diligent in determining which employees age 65 or older are and aren't eligible to open and fund a Health Savings Account.

In the example above, every covered faculty or staff member is enrolled in the Post-Deductible HRA, which is designed to benefit each equally. But the HRA that matches the school's Health Savings Account contribution can be offered only to employees who are not HSA-eligible.

The Bottom Line

Health Savings Accounts and Medicare don't mix. That's a problem with the growing number of working seniors who remain actively employed past their 65th birthday. A company that sponsors only an HSA-qualified medical plan can help working seniors who are no longer HSA-eligible by offering a similar - though not identical - account option to deliver employer funds to reimburse qualified expenses.

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HSA Wednesday Wisdom is published every other week, alternating with HSA Question of the Week. The content of this column is informational only. It is not intended, nor should the reader construe the content, as legal advice. Please consult your personal legal, tax, or financial counsel for information about how this information applies to you or your entity.

Working seniors who are enrolled in any Part of Medicare can’t make or receive Health Savings Account contributions, even if they remain enrolled on the company’s HSA-qualified plan. How can an employer that sponsors only HSA-qualified coverage help those working seniors with their deductible claims? Here’s one approach that makes them nearly whole.

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