Everything you need to know about tapping your HSA to pay for long term care insurance premiums.
Long term care can be one of the most significant expense in a person’s life, and more often than not, they are not prepared to handle the considerable cost that are associated with it.
However, by maximizing the use of your health savings account to pay for long term care insurance premiums, you can take some of the sting off of your health care and potential long-term care costs.
The Devastating Costs of Health Care and Long Term Care in Retirement
According to research from Fidelity Investments, the average couple turning age 65 today faces $315,000 in healthcare-related costs in retirement.
On top of that, the cost of long-term care services – such as assisted living and nursing home care – continues to skyrocket. According to the 2021 Genworth Cost of Care study, assisted living facilities cost top $54,000 per year. A private room in a nursing home costs double that: $108,000 per year, on average.
And these costs are not typically covered under Medicare or Medigap.
Fortunately, U.S. taxpayers have a couple of valuable tools available to help us get a handle on these expenses: long term care insurance and health savings accounts.
And they can work together in some important ways.
First let’s examine why long term care insurance is important.
What Are The Chances of Needing Long Term Care?
According to the Health Department figures, about 7 out of 10 people turning 65 today can expect to need some form of long term care services in their remaining years.
20% of today’s 65-year-olds – one in five – will need long term care for longer than five years (see Table 1).
Without some protection in place, those costs can easily wipe out an entire retirement income, a retirement nest egg, or both.
TABLE 1. CHANCES OF NEEDING LONG TERM CARE
|Type of Care||Average duration||Probability of needing this care|
| Any Services||3 years||69%|
Unpaid care only
Any care at home
Less than 1 year
Any care in facilities
Less than 1 year
Health Savings Account Basics
Health Savings Account, or HSAs, can help you pay for health care costs both now and in retirement. They can also save you thousands of dollars in taxes, and help provide more control over your doctors, your treatment, and how you spend your money.
Most people know that health savings accounts offer great tax benefits to those looking to save money to spend on future health costs. But very few know that it is actually possible to take money out of your account, tax free, in order to pay for long-term care insurance premiums now.
How are HSAs Taxed?
HSAs offer a triple tax benefit:
- Contributions are pre-tax – reducing taxable income.
- Interest and investment gains within the HSA are tax-free.
- Withdrawals for qualified medical expenses are also tax-free.
- HSA money can be used to pay medical expenses or direct long-term care costs, penalty free.
- HSA money can be used to pay qualified long-term care premiums, tax free, up to a certain amount, depending on your age
- Any amounts you don’t need for medical care are available to supplement retirement income, or for any other purpose, at age 65. At that age, withdrawals are penalty free. You only need to pay income tax on non-qualified withdrawals, just as you would with a traditional IRA or 401(k).
Note: You can’t ordinarily use HSA funds to pay traditional health insurance premiums. But Congress has created an exception in the U.S. Tax Code that specifically allows HSAs to pay for long term care insurance premiums.
The amount of long-term care premiums you can pay penalty-free using pre-tax and penalty-free dollars from an HSA is limited depending on your age.
Why Use an HSA to Pay for Long Term Care Premiums?
Generally, out-of-pocket medical expenses, including long term care insurance premiums, are deductible as itemized expenses on Schedule A of your individual income tax return – but without an HSA, these out-of-pocket expenses are deductible only to the extent they exceed 7.5% of your adjusted gross income AGI.
And if you don’t itemize, but instead take the standard deduction, you would receive no tax benefit at all from paying long term care premiums. You’d have to pay everything with after tax dollars.
But HSA contributions, in contrast, are “above the line” deductions. That is, they are made with pre-tax dollars, and not included in your adjusted gross income for the year.
There are two advantages to this:
- Your HSA contributions reduce your taxable income, even if you don’t itemize.
- The 7.5% threshold goes away. All your HSA-funded medical expenditures are made with tax-free dollars – not just expenditures over 7.5% of your adjusted gross income.
- An HSA allows you to pay your qualified long term care insurance premiums tax-free – up to the annual limit for your age group, detailed below.
Compare Pricing on the Best HSA Plans Available
Can a Health Savings Account Be Used for Long Term Care
Yes, I’ll say it again: You can use your HSA to pay LTC insurance premiums with pre-tax dollars. As long as your premiums are qualified, the money comes out completely tax and penalty-free.
What Kinds of LTCi Premiums Are Considered “Qualified?”
Not all long-term care insurance policies qualify for this favorable tax treatment. To qualify, your long term care policy must meet specific criteria, defined in IRC 7702(B).
- The policy must be guaranteed renewable.
- The policy must have no cash surrender value.
- The policy’s coverage must be limited to long-term care services.
- It must pay benefits if you lose the ability to perform at least two “activities of daily living” (ADLs) or if you have a cognitive impairment, such as Alzheimer’s Disease.
Note: Recently there have been a few hybrid life insurance/long term care policies that have been designed as qualified long-term care insurance premiums.
If you aren’t sure whether your long term care insurance policy is tax-qualified, contact your insurance carrier. Or contact an expert HSA for America personal benefits manager.
Long Term Care: An Expensive Threat to Your Retirement Plans
Here’s the thing about LTC … it can be way more expensive than most people think, sometimes in the range of multiple hundreds of dollars per day.
This is because things like retirement homes and assisted-living situations are packed with costs that are almost impossible to foresee without the help of a trained professional.
You’ve worked hard for those retirement funds. The last thing you want to see is all of it gone out the window before you have a chance to use it the way you have dreamed about. One of the ways to mitigate these costs is by taking advantage of the tax-free money you can pull from your health savings account.
While the amount of money you can contribute to an HSA is dependent on what type of policy you have (individual plan vs. family plan), the amount that you can take out for long-term care is based only on your age.
2023 HSA Long Term Care Premium Limits
Here’s how much you can take from your HSA each year per person to pay long term care premiums and still preserve the favorable tax treatment of an HSA and pay no penalties.
Note: in most cases, these age requirements are based on how old you will be by the end of the year.
- Ages 40 & Younger: $480
- Age 41 to 50: $890
- Age 51 to 60: $1,790
- Age 61 to 70: $4,770
- Age 71 and older $5,960
If you and your spouse both have long term care insurance, you can each take out enough money from your HSA penalty-free to pay long term care insurance premiums, up to your age-limited amounts.
Long Term Care and Medicaid Recovery
Long term care insurance often also has another valuable benefit: iIt can help shield your home and other family assets against state Medicaid recovery programs.
These programs are designed to recoup the costs of long-term care services provided to individuals who have depleted their assets and are eligible for Medicaid. But many of these programs will exempt assets by the amount of qualified long-term care insurance you have in place.
Example: Suppose you exhaust your assets while in long-term care, and qualify for Medicaid benefits in your state. The state spends $200,000 in Medicaid benefits on you.
While you’re alive and you or your spouse is still living in your home, your home is a ‘non-countable asset.’ when it comes to qualifying for Medicaid.
But after you and your spouse pass away or are no longer living in your home, without long-term care in place, the state will place a lien on your home or other assets for $200,000. They cannot pass to your heirs or have title transfer until that lien has been satisfied.
But if you have qualified long-term care insurance in place, the state will exempt the amount of long term care insurance you had from their Medicaid recovery efforts.
By using an HSA to pay your long term care insurance premiums, you can make your long term care insurance more affordable – and potentially purchase more of it to protect yourself and your family.
HSA Eligibility Criteria
To contribute to an HSA, you must be covered by a high-deductible health plan (HDHP), which is a health insurance plan with higher deductibles than traditional plans.
Because deductibles are higher, monthly premiums are generally lower – potentially saving hundreds or even thousands of dollars per year for policyholders.
Many people use some or all of the savings in monthly premiums to fund contributions to a health savings account.
Other eligibility criteria include:
- You must not be covered by another health insurance plan that is not an HDHP, with the exception of certain limited purpose flexible spending accounts (FSAs) and dental and vision plans.
- You must not be enrolled in Medicare.
- You must not be a dependent on someone else’s tax return.
2023 and 2024 HSA Contribution Limits
The HSA contribution limits for 2023 are $3,850 for self-only coverage and $7,750 for family coverage.
For tax year 2024, allowable HSA contribution limits are increasing to $4,150 for individuals, and to $8,300 for families – an increase of $300 and $550, respectively.
Those 55 and older can contribute an additional $1,000 as a catch-up contribution.
Talk to a Professional About Your HSA
Navigating the ins and outs of your Health Savings Account doesn’t have to be complicated. Talking directly with a Personal Benefits Manager is the easiest way to ensure that your long-term health care plan is as solid as it can be.
Have Questions? Call today and get the fast, friendly advice that you’ve been looking for. Your own personal Benefits Manager is standing by to help you get the most out of your retirement plans.
Here are some additional articles on Health Savings Accounts: Start Early: Planning for Long-term Care Costs | Why the American Middle Class is Ditching Health Insurance for Good | Use Your HSA to Pay for Chiropractic Care | How to Maximize the Value of Your Health Savings Account | How to Pay for Sunglasses With an HSA | How to Open an HSA
Here are some additional pages related to this article: HSA Insurance Plans | Term Life Insurance Quotes
Frequently Asked Questions About Health Savings Accounts and Long Term Care Insurance
Can I use my HSA to pay for long term care insurance premiums?
Yes – up to a certain amount based on your age. See the article above.
Are there any income limits or requirements to contribute to a health savings account?
Unlike Roth IRAs and certain other accounts, there are no maximum income caps that limit your ability to make pre-tax contributions to health savings accounts, or to make tax-free and penalty-free withdrawals to pay for qualified health expenses.
Can I use my HSA to pay health insurance premiums?
Health insurance premiums are not qualified medical expenses. But long term care insurance premiums are, as long as your insurance policy qualifies under IRC 7702(B).
Can I use my HSA to pay long term care insurance premiums even if it’s a cafeteria plan and my employer made all the contributions?
Can I use my HSA to pay for long-term care insurance premiums for my spouse or dependents?
Yes, you can use your HSA to pay for long-term care insurance premiums for your spouse or tax dependents, as long as they are covered under the policy.
Do I need to provide proof or documentation when using my HSA to pay for long-term care insurance premiums?
It’s advisable to keep records of your long-term care insurance premium payments in case of an audit. It’s good practice to retain receipts and documentation for your records.
Are there any age restrictions for using an HSA to pay for long-term care insurance premiums?
There are no age restrictions for using an HSA to pay for long-term care insurance premiums. As long as you meet the HSA eligibility criteria, you can use the funds regardless of age.
Can I use an HSA to pay my monthly contributions to a healthsharing plan?
You would have to pay income taxes on the amount you withdraw, as well as a 20% penalty if you are not yet 65 years old. Healthsharing plans are not qualified medical expenses according to IRS Publication 502 – Medical and Dental Expense.
Can I make HSA contributions if I’m enrolled in a healthsharing plan?
Yes, provided you are enrolled in HSA Secure. While most health share plans are not compatible with HSA contributions because they are not structured as health insurance policies, the HSA Secure Plan is specifically designed to preserve members’ eligibility to make pre-tax contributions to health savings accounts.
HSA Secure is a particularly cost-effective solution for those who earn too much to qualify for a subsidy under the Affordable Care Act, or who only qualify for a small one.
To enroll, you must be a business owner or have self-employed/independent contractor income.
A waiting period may apply before costs related to pre-existing conditions are fully shareable.
Read more about the HSA Secure plan.
How do I get started opening a health savings account?
Read our post explaining everything you need to know to open an HSA.