Can HSA Be Used for Long-Term Care?

A Health Savings Account (HSA) is a tax-advantaged savings account for individuals with high-deductible health plans, allowing for tax-free contributions, growth, and withdrawals for certain healthcare costs. Long-term care refers to a broad range of services for individuals who cannot care for themselves due to chronic illness or disability. The Internal Revenue Service (IRS) defines what constitutes a qualified medical expense, and understanding these rules is necessary before using HSA funds for care.

Qualified Long-Term Care Expenses

For long-term care services to be a qualified medical expense payable from an HSA, the IRS imposes two conditions. First, the individual must be certified as “chronically ill” by a licensed health care practitioner. A person is chronically ill if they cannot perform at least two activities of daily living, such as eating or bathing, without substantial assistance for at least 90 days. An individual can also be certified if they require substantial supervision due to severe cognitive impairment.

The second condition is that the services must be provided according to a “plan of care” prescribed by a licensed health care practitioner. This plan outlines the specific daily services required to assist the individual. Once these prerequisites are met, a range of services can be paid for using HSA funds, including diagnostic, therapeutic, preventive, and skilled nursing care.

Maintenance and personal care services are also eligible if their primary purpose is to assist a chronically ill individual. This includes help with activities of daily living, but not general household services like cleaning. The service must be directly related to personal care needs stemming from the chronic illness.

Using HSA Funds for Long-Term Care Insurance Premiums

The IRS allows HSA funds to be used for long-term care (LTC) insurance premiums, which is an exception for insurance payments. This enables account holders to use tax-advantaged savings to maintain an LTC insurance policy. To be eligible, the insurance contract must be guaranteed renewable and meet other requirements, such as not providing a cash surrender value.

There are limits on the annual premium amount that can be paid tax-free from an HSA. These limits are based on the policyholder’s age at the end of the tax year and are adjusted for inflation. The maximum amounts that can be withdrawn tax-free are:

• Age 40 or under: $480
• Age 41 to 50: $900
• Age 51 to 60: $1,800
• Age 61 to 70: $4,810
• Age 71 and over: $6,020

Any premium payment exceeding these age-based limits is not a qualified medical expense. If an individual’s annual LTC insurance premium is higher than the IRS limit, the excess amount cannot be paid from an HSA without incurring taxes and potential penalties.

Substantiation and Record-Keeping Requirements

When using an HSA for long-term care, the taxpayer is responsible for proving the expense is legitimate, as HSA administrators do not verify withdrawals. Record-keeping is necessary for a potential IRS audit. Failure to provide substantiation can result in the distribution being treated as taxable income, plus a 20% penalty if the account holder is under age 65.

To substantiate payments for long-term care services, you must retain several documents. These include detailed receipts from the provider indicating the service, date, and cost. You must also keep a copy of the written certification of “chronically ill” status and the “plan of care” from the licensed health care practitioner.

For payments of long-term care insurance premiums, you should keep a copy of the policy and the annual premium statement from the insurance company. These records demonstrate that HSA funds were used according to IRS regulations.

Process for Paying for Long-Term Care

There are two primary methods for using your HSA funds for qualified long-term care expenses. The first is to pay the provider or insurance company directly from your HSA. Most administrators provide a debit card or checks linked to the account for these payments.

The second method is to pay for expenses out-of-pocket and seek reimbursement from the HSA later. This allows your HSA funds to continue growing tax-free. You can reimburse yourself at any time after incurring the expense, as long as it was incurred after the HSA was established.

When you take a distribution from your HSA, the transaction is reported to the IRS. You must file IRS Form 8889 with your annual tax return. On this form, you report the total distributions and indicate the portion used for qualified medical expenses to ensure it is treated as tax-free.