Using HSA Savings for Long-Term Care

Using HSA Long Term.jpg

by Steve Christenson, Executive Vice President, Ascensus

While on vacation recently, I entered into a discussion with another couple and we shared our career backgrounds. The conversation led to how health savings accounts (HSAs) can be a key tool for retirement spending. As we all saw ourselves moving closer to retirement, the discussion shifted to the topic of using accumulated HSA assets during retirement, specifically for long-term care expenses.

HSA owners can use their HSA savings for qualified medical expenses at any age, but let’s consider other ways to use these assets—especially in retirement (after turning age 65)—and how they are taxed.

  • Qualified medical expenses—tax-exempt

  • Qualified medical expenses that occurred in the past (after the HSA was established) and were previously paid out of pocket—tax-exempt

  • Medicare premiums—tax-exempt

  • Qualified long-term care insurance premiums and qualified long-term care services—tax-exempt

  • Supplemental income for nonqualified expenses, such as home expenses, travel, or gifts for friends and family—taxed as ordinary income, but no 20 percent penalty tax after age 65

Qualified Long-Term Care

A married couple is expected to need up to $400,000 for out-of-pocket medical expenses during retirement. But many are not thinking about the expenses associated with long-term care. Although HSA owners cannot use their HSA assets to pay for expenses that are already covered (by insurance, Medicare, Medicaid, etc.), HSA assets can be used for qualified long-term care insurance premiums and qualified long-term care services.

Here are a few long-term care services that can be paid with HSA savings.

  • Payments for in-patient hospital care

  • Payments for residential nursing home care for medical reasons (If the main reason for this type of care is not medical, then only the medical expenses are qualified.)

  • In-home nursing services connected with patient care

In-Home Care

Let’s face it, most people prefer to hire help at home rather than go into a medical institution. So a frequent question is, “Can HSA savings be used for in-home care?” As described in IRS Publication 502, Medical and Dental Expenses, the IRS does allow this for qualified long-term care services, which are services required by a chronically ill individual and prescribed by a licensed healthcare practitioner as part of a care plan.

Home care expenses may not be fully qualified—only the portion of the expense paid for direct medical care is allowed.  For example, if home support personnel spend 20 percent of their time cleaning the residence, then that 20 percent is not qualified. If using the HSA savings for in-home care, individuals should document all expenses paid from the HSA, including documentation showing that the individual meets the IRS’ chronically ill definition.

Chronically Ill Definition

According to the IRS, an individual is “chronically ill” if within the previous 12 months, a licensed healthcare practitioner has certified that the individual meets one of the following descriptions.

1.     The individual is unable to perform at least two activities of daily living (e.g., eating, toileting, transferring, bathing, dressing, continence) without substantial assistance from another individual for at least 90 days, due to a loss of functional capacity.

2.     The individual requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment.

Family Assistance with Home Care

Let’s take this one step further. Most people would prefer to have a family member or close friend assist them with in-home care if that is an option. According to definitions outlined in IRS Publication 502, a family member may provide services if the services are similar to what a nurse provides (e.g., providing medication, change of dressings, bathing, and grooming). If this requirement is met, HSA savings could be used for these expenses.

While there is no prohibition against a family member providing these services, I strongly recommend that the HSA owner document and maintain itemized receipts for payment in the event that the IRS later questions it.

Share the Concept

As you can see, there is flexibility in using HSA savings beyond the common medical expenses that most people are aware of. Whether you are a bank, credit union, or financial advisor, you can now outline yet another HSA savings benefit and another reason HSAs can be a key financial planning tool for a more secure retirement.

I can tell you that by the time I finished this conversation with the initial couple, others were listening in. It is a message that people are looking for.

Note: To be eligible to make HSA contributions, individuals must be covered under a high deductible health plan (HDHP), not have coverage under another nonHDHP, not be enrolled in Medicare, and not be eligible to be claimed as a dependent on another individual’s tax return.