Trump’s Medicare reform would expand this tax-free account

Personal finance

U.S. President Donald Trump holds a signed executive order during an event in The Villages, Florida, U.S., on Thursday, Oct. 3, 2019.

EveEdelheit | Bloomberg | Getty Images

A little-used Medicare option is getting a big push from the White House.

An executive order signed on Thursday by President Donald Trump includes a call for expanding access to medical savings accounts, or MSAs. While details are thin, the move echoes other efforts by the administration geared at making tax-advantaged savings options more readily available to Medicare recipients.

Broadly, the executive order is about bolstering Advantage Plans, which are used by about 36% — 22 million — of Medicare’s 60.8 million beneficiaries.

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These plans, offered through private insurance companies, deliver Medicare Part A (hospital coverage) and Part B (outpatient care) benefits and often extras such as limited dental and vision coverage. They also typically include Part D prescription drug coverage.

While the use of Advantage Plans has been steadily rising, a small fraction of Medicare beneficiaries — about 6,000 — are estimated to use MSA plans, according to the Kaiser Family Foundation. Generally, this option combines a high-deductible Advantage Plan with an MSA.

It is similar to the better-known health savings account, or HSA, which also can only be used in conjunction with high-deductible health plans — a common offering among employers. For 2019, that’s one with a deductible of at least $1,350 for an individual and $2,700 for a family, with maximum annual out-of-pocket costs (not counting premiums) of no more than $6,750 and $13,500, respectively. That excludes out-of-network costs.

HSAs also come with a triple tax benefit: Contributions, earnings and qualified withdrawals are tax-free. However, under current law, Medicare beneficiaries cannot contribute money to HSAs.

Likewise, recipients also can’t contribute to MSAs. The insurer that offers the plan makes the contributions — an amount that could vary from year to year — and you can make tax-free withdrawals to cover medical expenses.

However, MSA plans do not include Part D prescription drug coverage, according to the Centers for Medicare and Medicaid Services.

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While it’s uncertain what regulatory changes would be proposed to expand access to MSAs, Trump’s 2020 budget proposal included allowing Medicare beneficiaries to contribute to such accounts with annual contribution limits matching those on HSAs. For 2019, those caps are $3,500 for individual and $7,000 for family coverage. People age 55 or older can put an extra $1,000 in per year.

Consumer advocates view the expansion of such tax-advantaged accounts as a move that would largely benefit wealthier households, which are more likely to have extra cash to put in the accounts — and often leave it there as an investment instead of withdrawing the money to pay for medical expenses.

Expanding MSAs would “help the healthy and wealthy,” said David Lipschutz, associate director at the Center for Medicare Advocacy. “That shouldn’t be a health policy goal.”

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