While most attention in Washington has focused on headline tax relief provisions in the "big, beautiful" reconciliation package — like eliminating taxes on tips, bonuses, and overtime — there’s another reform quietly making its way through the Senate that could have a major impact on working seniors.
It fixes a little-known but longstanding flaw in federal tax law that has penalized low-income retirees who stay in the workforce: the automatic link between Social Security and Medicare Part A, which blocks seniors from contributing to Health Savings Accounts (HSAs).
Once an American claims Social Security, they are automatically enrolled in Medicare Part A, the part of Medicare that covers seniors' inpatient hospital care. That may sound harmless, but it is problematic when considering that Section 223 of the Internal Revenue Code prohibits Medicare enrollees from contributing to HSAs or receiving employer HSA contributions. There’s no opt-out. That means older Americans who need Social Security to make ends meet are cut off from an important savings vehicle used to manage out-of-pocket healthcare costs.
When HSAs were created in 2003, lawmakers assumed Medicare would cover all healthcare needs for retirees, so HSAs were intended mainly for pre-retirement savings. But nearly 30 years later, it’s clear Medicare alone isn’t enough. The program faces ongoing funding challenges and doesn’t cover many out-of-pocket costs seniors face, leaving retirees financially vulnerable. Allowing working seniors to keep contributing to HSAs after enrolling in Medicare would help fill these gaps and provide much-needed financial relief.
The impact of the ban on HSAs for Social Security recipients is stark. Imagine two older workers at the same company: one is a high-earning accountant making $100,000 a year who delays Social Security to boost future benefits. The other, a mailroom worker earning $30,000, claims Social Security at 62 to pay the bills. Under current rules, the wealthier employee can receive $500 a month in HSA contributions from their employer. The lower-income worker cannot. Same job, same benefit, denied only because of income level and timing.
Maintaining the HSA ban for Social Security recipients is also expensive. Seniors blocked from HSA participation often forgo employer coverage altogether and enroll in Medicare Parts B (outpatient medical services) and D (prescription drug coverage), shifting costs to the federal government. According to the Medicare Trustees, taxpayers cover about 75% of those program costs.
Worst of all, this HSA ban isn’t a policy Congress ever voted on. The restriction stems from a bureaucratic rule quietly inserted into the Medicare Program Operations Manual in the 1990s. Former House Majority Leader Dick Armey and others challenged it in court more than a decade ago, arguing that seniors should be able to decline Medicare Part A without losing Social Security. They lost the case on procedural grounds.
Fortunately, the House version of the tax package included a provision to restore HSA eligibility for working seniors enrolled in Medicare Part A. Early Senate drafts left it out, but after strong advocacy from consumer groups and healthcare stakeholders across the aisle, the fix is under consideration to be reinserted into the current Senate package.
It’s a common-sense reform with broad benefits: it strengthens individual savings, supports employer-sponsored coverage, reduces pressure on federal healthcare programs, and removes an arbitrary penalty on low-income seniors who work. With nearly one in five Americans over age 65 still in the workforce, it's a long-overdue update to reflect modern retirement realities.
Congress didn’t create this problem, but it’s the only body that can fix it. Updating Section 223 of the Internal Revenue Code to allow HSA participation for working seniors on Medicare Part A is the right thing to do. And thanks to this tax package, that long-overdue fix is finally within reach.
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