Paying Long Term Care Premiums With an HSA

A Health Savings Account (HSA) is a tax-advantaged savings account for healthcare costs, while long-term care (LTC) insurance covers services for those needing extended assistance with daily living. The Internal Revenue Service (IRS) permits using HSA funds to pay for LTC insurance premiums. This arrangement is governed by a distinct set of rules and financial limitations that must be followed.

Requirements for a Tax-Qualified Long-Term Care Policy

For long-term care insurance premiums to be payable with HSA funds, the policy must be “tax-qualified” under federal law. This designation means the policy adheres to standards in Section 7702B of the Internal Revenue Code. A primary requirement is that the policy must exclusively cover long-term care services. Policies that combine LTC with life insurance, often called hybrid policies, generally do not qualify, though some with a separately designated LTC rider may be an exception.

A tax-qualified policy must be guaranteed renewable, which means the insurance company cannot cancel the policy as long as premiums are paid. The contract is also prohibited from having a cash surrender value, meaning it cannot be terminated for a lump-sum cash payment. The policy must also incorporate specific consumer protection provisions that align with the National Association of Insurance Commissioners (NAIC) Model Act.

The policy’s benefit structure is also strictly defined. A licensed health care practitioner must certify that an individual is chronically ill, meaning they are unable to perform at least two of the six Activities of Daily Living (ADLs) without assistance for at least 90 days. The six ADLs are:

• Eating
• Bathing
• Dressing
• Toileting
• Transferring from a bed to a chair
• Maintaining continence

Alternatively, benefits can be triggered if the individual has a severe cognitive impairment, such as Alzheimer’s disease.

Age-Based Limits for Premium Withdrawals

The amount of a long-term care premium that can be paid tax-free from an HSA is subject to annual, age-based limits set by the IRS. These limits dictate the maximum portion of the premium that can be treated as a qualified medical expense. For the 2025 tax year, the limits are as follows:

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

These limits are applied on a per-person basis, meaning a married couple can use the limits applicable to each spouse individually.

If an individual’s actual annual premium is less than their age-based limit, only the actual premium amount can be withdrawn from the HSA tax-free. For example, a 65-year-old with a $4,000 annual premium can only use $4,000 of HSA funds, not the full $4,810 limit. If the premium exceeds the age-based limit, the excess amount cannot be paid or reimbursed with tax-free HSA funds.

Paying Premiums and Tax Reporting

When using HSA funds for LTC premiums, payment can be handled in two ways. You can arrange for the premium to be paid directly from the HSA to the insurance company, if the administrator offers this service. Alternatively, the policyholder can pay the premium out-of-pocket and then take a distribution from their HSA as a reimbursement. This reimbursement is tax-free up to the applicable age-based limit for the year.

At the end of the year, the HSA custodian will issue Form 1099-SA, which reports the total gross distributions from the account. The taxpayer must then complete and file Form 8889, Health Savings Accounts (HSAs), with their tax return. On Form 8889, the amount of the LTC premium, up to the allowed limit, is included with any other qualified medical expenses.

If a withdrawal for an LTC premium exceeds the allowable age-based limit, the excess portion is considered a non-qualified distribution. This excess amount must be reported as “other income” on the tax return and will be subject to ordinary income tax. For account holders under the age of 65, this non-qualified portion is also subject to a 20% tax penalty.