McHugh Introduces Legislation to Help Individuals Save Money Now to Pay for Health Care Costs in Retirement

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Washington, D.C. – Congressman John M. McHugh (R- Pierrepont Manor) announced today that he has introduced legislation that would allow Americans to better meet the escalating cost of health care in retirement. Congressman McHugh’s legislation, the Retiree Health Account Act of 2008, H.R. 6288, would help Americans save for health care costs in their retirement by creating two savings accounts designed to encourage tax-free savings for qualified medical expenses. Congressman McHugh introduced the legislation with Congressman Randy Kuhl (R-NY), Congressman Jim Walsh (R-NY), and Congressman Peter King (R-NY).

“Health care costs for retirees have reached record levels, with individuals incurring enormous financial expenses. Currently, there are no tax incentives for individuals who wish to save money specifically to cover health care costs in their retirement – something this legislation would change. The Retiree Health Account Act would allow workers to save money pre-tax to use for health care in their retirement, providing an incentive for individuals to start saving now for the thousands of dollars of expenses that most retirees face,” said McHugh. “We need to address rising health care costs for retirees and this bill helps to provide a solution that would benefit both my constituents and Americans across the country. I look forward to continuing to work on this proposal with my fellow Members of Congress.”

Americans are paying a rapidly increasing amount for health care in their retirement, even with Medicare benefits. Estimates indicate the average American couple who are both age 65 today could need as much as $295,000 to cover the premiums for health insurance coverage and out-of-pocket health care expenses during retirement. Costs for medical services rose 185 percent between 1985 and 2005 as compared to 82 percent for all goods and services. Additionally, many private sector employers have reduced retiree health benefits, which continue to burden individuals with a larger share of health care costs.

The Retiree Health Account Act of 2008 would create two separate savings accounts for individuals to utilize when saving for the health care costs they will incur in retirement. The first account, the Retiree Health Account (RHA), allows individuals to contribute up to the 401(k) contribution maximum per year in pre-tax earnings as well as additional “catch-up” deferrals of up to $5,000 per year after age 50. Once an RHA account holder reached age 55, he or she would be able to withdraw monies tax-free when paying for things like qualified medical care, health insurance, long-term care services, and prescription drugs. Early withdrawal would be subject to ordinary income taxes and a 10 percent penalty, unless the individual is disabled, facing medical hardship, or the money was used to purchase health insurance during a period of unemployment.

The second account created by Congressman McHugh’s legislation, the Individual Health Account, would be structured similarly to an Individual Retirement Account (IRA). This would allow eligible individuals to contribute up to $5,000 a year in pre-tax money, with individuals 50 and older contributing up to $6000 a year. Similar to the RHA account, funds could be withdrawn tax-free if used for qualifying medical expenses after age 55 or if the individual faces disability, unemployment, or extraordinary medical expenses.

To help lower-income Americans, Congressman McHugh’s legislation would also provide a refundable tax credit of up to $1,000 for individuals who tax advantage of the opportunity to contribute to RHAs and IHAs, up to a maximum of $5,000 in a lifetime.

The Retiree Health Account Act of 2008 was referred to the Committee on Ways and Means for consideration.

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