About Health Retirement Accounts

Health Retirement Accounts are also known as Retirement Medical Benefit Accounts. They allow individuals to establish a tax-advantaged account within a traditional IRA or 401K plan. The money in the account accumulates tax-free, and is used for post-retirement medical expenses. Unlike IRA plans and 401K plans, whose funds are taxed as ordinary income upon withdrawal, funds withdrawn from a Health Retirement Account are tax-free, as long as they are used for medical expenses.

History

Then-Senate Majority Leader Bill Frist proposed the plan on July 12, 2004. The plan was designed by Fidelity Investments, whose research analysts found that most pre-retirees are unprepared for the medical costs of retirement, and that medical costs were rising three times faster than the average salary. Fidelity's Employee Benefit Research Institute determined that a couple retiring in 2008 would need $295,000, assuming a 15-year post retirement life expectancy for the husband and a 20-year post-retirement life expectancy for the wife.

Misconceptions

While a Health Retirement Account works on a principle similar to a Health Savings Account, they are somewhat different. A Health Savings Account is available only for individuals who have a high-deductible health insurance plan. These stipulations do not apply to a Health Retirement Account. Additionally, funds from a Health Savings Account can be withdrawn for medical expenses incurred before retirement, whereas money from Retirement Medical Benefit Accounts can only be withdrawn after retirement.

Theories/Speculation

The fear of losing their health insurance keeps some Americans from retiring before, or even after, age 65. In some cases, health conditions may be exacerbated by continuing to work a 40-hour work week. The availability of money for health expenses may eliminate the need to continue working. This might also open up additional jobs for recent college graduates.

Potential

The International Foundation of Employee Benefit Plans suggests a strategy that involves transferring an employee's unused vacation or sick days into funds for a Health Retirement Account. Some elected officials and state government employees are already allowed to do this, according to the Indiana State Budget Agency.

Criticism

The Center on Budget and Policy Priorities thinks that the tax-free accumulation and withdrawals from Retirement Medical Benefit Accounts may eventually increase the federal deficit. They argue that the revenue losses from these plans might lead to budget cuts, and Medicare might be one of the programs that gets cut.