2015 National Training Program

Tax-Favored Programs and

Medicare Health Care Costs

▪ Health Reimbursement Arrangements ▪ Flexible Spending Arrangements ▪ Health Savings Accounts ▪ Medicare Medical Savings Accounts

July 2015

Regulation of Tax-Favored Health Accounts

▪ Regulated by the Internal Revenue Service (IRS)• Medicare Medical Savings Accounts are the

only exception❑ Medicare has oversight

▪ “Qualified medical expenses”—Types of medical costs eligible to be covered by funds in these accounts• Defined and regulated by the IRS

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Qualified Medical Expenses

▪ Defined by the Internal Revenue Service (IRS)• Costs of diagnosis, cure, mitigation, treatment, or

prevention of disease, and the costs for treatments affecting any part or function of the body

• Must be primarily to alleviate or prevent a physical or mental defect or illness

▪ Qualified medical expenses are those specified in the plan that would generally qualify for the medical and dental expenses deduction • These are explained in IRS Publication 502

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More Qualified Medical Expenses

▪ A medicine or drug is a qualified medical expense only if the medicine or drug• Requires a prescription• Is available without a prescription (an over-the-counter

medicine or drug) and you get a prescription for it, or • Is insulin

▪ Generally non-prescription medicines (other than insulin) aren’t considered qualified medical expenses

▪ Qualified medical expenses are those incurred by the following persons• You and your spouse• All dependents you claim on your tax return

❑ Any person you could’ve claimed as a dependent on your return (with some exceptions)

07/01/2015 Tax-Favored Programs and Medicare Health Care Costs 4

Different Types of Tax-Favored Health Accounts

▪ Health Reimbursement Arrangement (HRA)▪ Flexible Spending Arrangement (FSA)▪ Health Savings Account (HSA)• Medical Savings Account (MSA)

▪ Medicare Medical Savings Account (MSA)

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What Is a Health Reimbursement Arrangement (HRA)?

▪ HRA or a “health reimbursement account” or a “personal care account”• Reimburses employees for qualified medical expenses• Is a type of group health plan• Must be funded solely by an employer• Subject to Medicare Secondary Payer reporting once

Medicare eligible • Can be offered with other employer-provided health

benefits, including Flexible Spending Arrangements

07/01/2015 Tax-Favored Programs and Medicare Health Care Costs 6

Benefits of a Health Reimbursement Arrangement (HRA)

▪ Contributions made by your employer can be excluded from your gross income

▪ Reimbursements are tax-free if used to pay for qualified medical expenses

▪ Any unused amounts in the HRA can be carried forward for reimbursements in later years

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Medicare Considerations and Health Reimbursement Arrangements (HRAs)▪ Employers may allow employees to access their HRA

funds after retirement to pay for • Qualified medical expenses including

Medicare premiums, deductibles, and cost-sharingMedigap (Medicare Supplement Insurance) policy premiums

• A person with Medicare may only withdraw funds• Employer can no longer contribute to the account

▪ Decide whether to enroll in Medicare or delay• May generally not opt-out of Medicare coverage if

receiving Social Security retirement benefits

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HRA funds can be used to pay Medicare premiums, deductibles and cost-sharing amounts.

a. Trueb. False

07/01/2015 Tax-Favored Programs and Medicare Health Care Costs 9

Check Your Knowledge 1 Health Reimbursement Arrangements (HRA)

HRA funds can be used to pay Medigap (Medicare Supplement Insurance) policy premiums.

a. Trueb. False

07/01/2015 Tax-Favored Programs and Medicare Health Care Costs 10

Check Your Knowledge 2 Health Reimbursement Arrangements (HRA)

What Is a Flexible Spending Arrangement (FSA)?

▪ FSA or a “flexible spending accounts,” or a “cafeteria plan”▪ Reimburses employees for qualified medical expenses as they’re

incurred▪ Not considered a group health plan• Employer-establish benefit plan

▪ Employee contributes through voluntary salary reduction agreement

▪ Employers may also contribute▪ Only allows a maximum of $500 carried over to the next year▪ Employee can have coverage through other insurance

07/01/2015 Tax-Favored Programs and Medicare Health Care Costs 11

Benefits of a Flexible Spending Arrangement (FSA)

▪ Contributions made by your employer can be excluded from your gross income

▪ No employment or federal income taxes are deducted from the contributions

▪ No withdrawals • Only reimbursements of qualified medical expenses

as they are incurred ▪ Not required to report on your income tax return

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Medicare Considerations and Flexible Spending Arrangements (FSAs)

▪ You can use FSA funds to pay for • Qualified medical expenses including

❑ Medicare deductibles and copayments ❑ Medigap (Medicare Supplement Insurance) policy premiums

▪ They can’t be used to pay Medicare premiums

• As long as you’re employed, you can continue to make contributions to your FSA through payroll deduction • Enrollment in Medicare won’t prohibit your ability to contribute

▪ Decide whether to enroll in Medicare or delay• May generally not opt-out of Medicare coverage if receiving Social

Security retirement benefits

07/01/2015 Tax-Favored Programs and Medicare Health Care Costs 13

Flexible Spending Arrangement (FSA) Restrictions

▪ You can’t receive reimbursements from your FSA for the following expenses • Health insurance premiums • Long-term care coverage or expenses • Amounts that’re covered under another health

plan

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FSA funds can be used to pay Medicare premiums, deductibles and cost-sharing amounts.

a. Trueb. False

07/01/2015 Tax-Favored Programs and Medicare Health Care Costs 15

Check Your Knowledge 3 Flexible Spending Arrangement (FSA)

FSA funds can be used to pay Medigap (Medicare Supplement Insurance) policy premiums.

a. Trueb. False

07/01/2015 Tax-Favored Programs and Medicare Health Care Costs 16

Check Your Knowledge 4 Flexible Spending Arrangement (FSA)

What Is a Health Savings Account (HSA)?

▪ HSA or sometimes generally called a “Medical Savings Account”

▪ Account funds used for qualified medical expenses

▪ High-deductible health plan (HDHP) and tax-sheltered account• Not a group health plan

▪ Funded by any eligible individual• Eligibility based on the type of HSA

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Benefits of a Health Savings Account (HSA)

▪ Account can accumulate tax-deferred interest

▪ Used to pay current and future qualified medical expenses

▪ Account funds are fully vested and not subject to forfeiture

▪ Once you’re 65, you can use HSA funds to pay for • Qualified expenses including

❑ Medicare premiums (Part A, Part B, Part C, and Part D) ❑ Long-term care insurance-subject to limits based on age

and are adjusted annually

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Medicare Considerations and Health Savings Accounts (HSAs)

▪ Can’t have another source of health insurance• Including Medicare

▪ Use funds after retirement to pay • Qualified medical expenses including

Medicare premiums, deductibles and cost-sharing▪ You can’t use funds after retirement for

Medigap (Medicare Supplement Insurance) policy premiums

• A person with Medicare may only withdraw funds• Can no longer contribute to the account or will have

penalties ❑ 6% tax penalty on any contributions and their interest

until they withdraw the amount from their account 07/01/2015 Tax-Favored Programs and Medicare Health Care Costs 19

More Medicare Considerations and Health Savings Accounts (HSAs)

▪ Decide whether to enroll in Medicare or delay▪ If you get Social Security retirement benefits, you’re automatically

enrolled in Medicare when you turn 65▪ Stop contributing to the HSA prior to your Medicare effective date to

avoid any IRS penalties • Generally can’t opt-out of Medicare if getting Social Security

retirement benefits• You’d have to withdraw from monthly Social Security retirement

benefits and repay any retirement benefits paid to date▪ Payments made to your HSA once your Medicare is effective have

a tax penalty▪ Even if due to retroactive Medicare enrollment

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HSA funds can be used to pay Medicare premiums, deductibles and cost-sharing amounts.

a. Trueb. False

07/01/2015 Tax-Favored Programs and Medicare Health Care Costs 21

Check Your Knowledge 5 Health Savings Account (HSA)

HSA funds can be used to pay Medigap (Medicare Supplement Insurance) policy premiums.

a. Trueb. False

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Check Your Knowledge 6 Health Savings Account (HSA)

Medicare Enrollment Reminders Related to HRAs and HSAs

▪ Allowed 63 days to join a Part D plan if you lose current employer drug coverage or if it’s no longer creditable

▪ You may be eligible for a Medicare Part B SEP if you’re over 65 and you (or your spouse) are still working and have health insurance through active employment

▪ Remember the Special Enrollment Periods (SEPs) for Part B and Part D have different enrollment time frames ▪ Your Part B SEP lasts for 8 months and begins the month after

your coverage ends▪ However, your Part D SEP lasts for only 63 days after the month

your coverage endsNOTE: You can enroll in Part A at anytime after your Initial Enrollment Period, if you’re entitled to premium-free Part A. 23

Dan turned 65 in July. He’s working and has health insurance coverage through a Health Savings Account. He thought that this would allow him to delay enrollment in Medicare even though he’s entitled to premium-free Part A, so he took no action. Four months later (November) he learned that his prescription drug coverage isn’t creditable. He tried to enroll in Part D but found out he’s ineligible because he doesn’t have Medicare Part A or Part B. NOTE: Dan’s income would require him to pay the standard Part B premium ($104.90 in 2015). 07/01/2015 Tax-Favored Programs and Medicare Health Care Costs 24

Scenario 1

When’s the next time that Dan can enroll in Medicare Part A?a. Special Enrollment

Period (SEP)b. General Enrollment

Period (GEP)c. Medicare Open

Enrollment Period (OEP)

d. Any time during or after his Initial Enrollment Period (IEP)

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Check Your Knowledge 7

Will Dan’s Medicare Part D costs be affected?

a. Yesb. No

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Check Your Knowledge 8

Just suppose that Dan’s given retroactive Medicare enrollment of 4 months, back to July 1. What would happen regarding his Health Savings Account (HSA) account?

a. Nothing, he’s coveredb. He’d have an IRS penalty for

concurrent Medicare enrollment

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Check Your Knowledge 9

Peggy is currently employed and is turning 65 next month. She started collecting Social Security retirement benefits at 63. She’s covered by a Health Savings Account (HSA) through her employer.

07/01/2015 Tax-Favored Programs and Medicare Health Care Costs 28

Scenario 2

What will happen when Peggy turns 65?a. She can delay

Medicare enrollmentb. She’ll be

automatically enrolled into Medicare

c. She needs to contact Social Security directly to enroll

d. None of the above07/01/2015 Tax-Favored Programs and Medicare Health Care Costs 29

Check Your Knowledge 10

How will Peggy’s Health Savings Account (HSA) be affected?a. She can no longer

contribute b. She’ll have IRS penalties

if she contributes while enrolled in Medicare

c. All of the aboved. Not at all

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Check Your Knowledge 11

Medicare Medical Savings Accounts (MSAs)

▪Medicare MSAs are currently only available in 3 states1. Pennsylvania2. New York3. Wisconsin

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What Is a Medicare Medical Savings Account (MSA)?

▪ Medicare Advantage Medical Savings Account (MSA) ▪ Similar to Health Savings Account (HSA)▪ High-Deductible Medicare Health Plan (HDHP) and a

tax-sheltered account▪ Funded by Medicare only▪ Must have Medicare Part A and Part B▪ Account funds not taxed when used for qualified out-

of-pocket medical expenses▪ Current and future medical expenses▪ Currently only available in 3 states• Pennsylvania, New York and Wisconsin

07/01/2015 Tax-Favored Programs and Medicare Health Care Costs 32

Medicare Medical Savings Accounts (MSAs) Continued

▪ CMS (via the plan) makes an annual deposit into the savings account• Individuals may not contribute their own funds• No employer contributions allowed• Other Health Savings Account funds can’t be rolled

into the MSA account• Funds remaining at the end of the year carry over

to the following year

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Medicare Medical Savings Account (MSA) Regulation

▪ Medicare has oversight of the Medicare Advantage MSAs• Regulates the Medicare Advantage Plan portion• Exclusively funds the Medical Savings Account portion

▪ You can get more information:• 1-800-MEDICARE (1-800-633-4227) • TTY users should call 1-877-486-2048 • Medicare.gov

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Medicare Medical Savings Account (MSA) Benefits and Cost Sharing

▪ MSA benefit package must cover all Medicare Part A and Part B services

▪ MSA plans may or may not have contracted providers, but MSA plans can’t restrict access to a network of providers

▪ May not provide supplemental benefits that cover expenses that count toward the plan deductible, nor can the member purchase this coverage elsewhere

35Tax-Favored Programs and Medicare Health Care Costs07/01/2015

Medicare Medical Savings Account (MSA) Benefits and Cost Sharing—Continued

▪ There’s no monthly plan premium (other than an optional supplemental benefit premium, if offered), and people with Medicare must continue to pay the Medicare Part B premium

▪ Statutorily restricted from providing Part D coverage▪ MSA enrollees can join a stand-alone Medicare

Prescription Drug Plan (PDP)• MSA funds can’t be used to pay the Part D premium, but

can be used to cover copayments, coinsurance and deductibles for Part D

• MSA funds used to pay for Part D drugs count towards your true out-of-pocket costs

07/01/2015 Tax-Favored Programs and Medicare Health Care Costs 36

Medicare Medical Savings Account (MSA) Election Periods

▪ All MSA enrollments must be done through the MSA Plan

▪ Enrollment is generally for the full calendar year▪ Beneficiaries can only enroll during 2 election periods• During their Initial Enrollment Period • During the Annual Open Enrollment Period

❑ October 15 – December 7 each year ❑ Coverage begins January 1 of the new year

▪ Special Enrollment Periods (SEPs)• The only SEP allowed is for employer group health plan coverage• All standard SEPs are allowed for disenrollment

37Tax-Favored Programs and Medicare Health Care Costs07/01/2015

▪ Those with End-Stage Renal Disease (ESRD)• There’re some limited exceptions

• Those who don’t reside in the United States for at least 183 days during the year

▪ Medicaid eligible individuals▪ Those who’ve elected to receive Medicare

hospice care▪ Those covered under Federal Employee Health

Benefits Plan, Veterans Administration, or military health Individuals benefits

38Tax-Favored Programs and Medicare Health Care Costs07/01/2015

People with Medicare Who Can’t Enroll in a Medicare Medical Savings Account (MSA)

▪ Those 65 or older and still working ▪ Individuals with supplemental policies that would

cover part or all of the MSA plan deductible (Medicare Part A and B services), such as Medigap policies and employer plans that cover any Original Medicare services • Supplemental coverage for services not covered by

Medicare is allowed, including: dental, vision, hearing, long-term care, and Worker’s Compensation

39Tax-Favored Programs and Medicare Health Care Costs07/01/2015

Who Can’t Enroll in a Medicare Medical Savings Account (MSA) Continued

Medicare Medical Savings Account (MSA) and Insurance Premiums

▪ You can’t treat insurance premiums as qualified medical expenses unless the premiums are for: 1. Long-term care insurance 2. Health care continuation coverage (such as coverage

under COBRA) 3. Health care coverage while receiving unemployment

compensation under federal or state lawNOTE: Medicare premiums for coverage of your spouse or a dependent generally aren’t qualified medical expenses

07/01/2015 Tax-Favored Programs and Medicare Health Care Costs 40

Resources

▪ To find out more information about Medicare Medical Savings Accounts• CMS.gov/Medicare/Health-Plans/MSA/Downloads/MSA

FactSheet-11-19-10.pdf• Medicare.gov/Publications/Pubs/pdf/11206.pdf

▪ To find out about the different kinds of Tax-Favored Health Savings Accounts• irs.gov/pub/irs-pdf/p969.pdf • Call the IRS at 1-800-829-1040• TTY users should call 1-800-829-4059

07/01/2015 Tax-Favored Programs and Medicare Health Care Costs 41

More Resources

▪ To find out about Qualified Medical Expenses• IRS.gov/pub/irs-pdf/p502.pdf

▪ To contact the Office of the Medicare Ombudsman• Medicare.gov/claims-and-appeals/medicare-rights

/get-help/get-help-with-medicare-rights.html• Call 1-800-MEDICARE. TTY users should call 1-877-

486-2048

07/01/2015 Tax-Favored Programs and Medicare Health Care Costs 42

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