Long-term care is a major expense that most seniors will need at some point. Unfortunately, many people don’t know how to pay for long-term care. One option available to many seniors is using an HSA to pay for long-term care.
What Is an HSA?
An HSA is a Health Savings Account. According to HealthCare.gov, it’s a special type of savings account that lets you save money on a pre-tax basis and use the untaxed dollars to pay for qualified medical expenses.
HSA funds do not expire, so once you have an account, you don’t have to worry about losing money you don’t use immediately. HSAs are also portable, so you can keep them when you change jobs or retire. However, you can’t contribute to your HSA unless you’re currently enrolled in a high-deductible health plan (HDHP). Medicare is not considered an HDHP, so Medicare enrollees can’t contribute to an HSA, but they can keep an HSA that they already have and use the funds.
Contributing to an HSA
According to the IRS, the person who owns the HSA can contribute to the account up to the annual limit. The person’s employer can also make contributions, and so can any family member or other person who wants to contribute.
In 2022, the contribution limit for someone with self-only HDHP coverage is $3,650, and the contribution limit for someone with family HDHP coverage is $7,300. Individuals who are 55 or older at the end of the tax year can contribute an additional $1,000 per year.
What Are Qualified Medical Expenses?
One of the biggest advantages to HSAs is the tax benefits. HSAs are funded with pre-tax money, and the distributions can also be tax free. Watch out, though – using an HSA for non-eligible expenses can result in hefty tax penalties. The IRS says that funds that are withdrawn for anything other than qualified medical expenses are subject to income tax and a 20% tax penalty. However, the tax penalty does not apply to people who are age 65 or older.
In general, medical and dental expenses can be deducted, but there are some exceptions. For example, diet food is not deductible. Cosmetic surgery is not deductible, either, unless it’s necessitated by a congenital abnormality, an injury or a disfiguring disease. See IRS Publication 502 for a list of medical and dental expenses that are generally allowable.
Can HSAs Be Used to Pay for Long-Term Care?
If you have an HSA, you can use the HSA funds to pay for long-term care in some situations.
Long-term care refers to assistance with daily activities of life, such as eating and bathing. According to the Administration for Community Living, research has shown that most people turning 65 will need long-term care at some point.
Because long-term care is often non-medical in nature, it is not typically covered by Medicare or other types of health insurance. Care can be provided at home or in nursing home or other long-term care facility – and it’s expensive. One month in a semi-private room in a nursing home can cost $6,844 on average, while a home health aide might charge around $20.50 per hour on average.
HSAs can be used to cover some of these expenses. According to IRS Publication 502, long-term care services are eligible expenses if they are required by a chronically ill individual and provided as part of a plan or care prescribed by a licensed health care practitioner. Maintenance and personal care services are eligible if the primary purpose is to provide a chronically ill individual with assistance that is needed due to the person’s disabilities.
IRS Publication 502 also states that nursing services are typically considered allowed medical expenses. To qualify, the services can be provided in the individual’s home or in a facility, and the services do not need to be provided by a nurse. However, the services do have to relate to caring for the individual’s condition, such as giving medication or bathing or grooming the patient. If the worker also does household chores, this amount can’t be included.
Can HSAs Be Used to Pay for LTCI Premiums?
HSAs can be used to pay for long-term care insurance premiums.
According to the IRS, most insurance premiums are not considered qualified medical expenses, but there are some exceptions. HSA funds can be used for long-term care insurance, as well as health care continuation coverage and Medicare and other health insurance if you’re 65 or older.
However, not all long-term care insurance policies are eligible. To qualify, the policy must be guaranteed renewable and meet certain other requirements and limitations regarding the use of refunds, cash surrender value and reimbursements.
Additionally, there are limits to the amount that can be deducted for long-term care insurance premiums. In 2021, the following amounts are the maximum eligible deductions for long-term care insurance premiums, based on age:
- 40 or younger: $450
- 41 to 50: $850
- 51 to 60: $1,690
- 61 to 70: $4,520
- 71 or older: $5,640
Because most seniors will need long-term care, and because care is so expensive, it’s important to plan for this cost. Using an HSA to pay for long-term care insurance is a solid option, and one that many seniors might not know about. This is a good opportunity for insurance brokers. Download our LTC-HSA Client Handount as well as the LTCI Broker Opportunity Kit.