Use HSA to Pay for Long Term Care Insurance Premiums

More American families now have tax-advantaged HSAs that they contribute through a payroll deduction at work. Health Savings Accounts, otherwise known as HSAs, can save you money with lower health insurance premiums. Some employers will match the employee's contributions to these tax-deferred plans. 

Each year the federal government allows you to contribute more money to these accounts, even allowing some people at certain ages to "catch up" and contribute even more money.

There are more advantages with an HSA as the pre-tax money in the account, growing tax-deferred, is your money for life. The money you don't need to use stays in the account and grows. There is an additional tax advantage as the money you contribute reduces your taxable income.

HSA vs. FSA 

Don't confuse Flexible Spending Accounts (FSAs) with HSAs. The money inside HSAs do not have to be used within a calendar year. It is your money (like a 401(k) and goes with you when you leave your job or retire. The money inside the HSA grows tax-deferred and comes out tax-free if used for qualified health-related expenses (including Long-Term Care Insurance premiums).

With an FSA, you can contribute pre-tax money to pay for a variety of health-related expenses like over the counter and prescription drugs and supplies, vision and dental care, and more. However, you must use the money within the calendar year. An FSA is a use-it-or-lose-it benefit.

HSA and Long-Term Care Insurance

Even though more Americans are purchasing Long-Term Care Insurance in their 40s and 50s, few are aware they can use the pre-tax money in these accounts to reimburse themselves for the cost of the premiums.

These pre-tax accounts, unlike flex plans, stay with you forever because you own the account. It is your money that can be used for any health-related expense. Health Savings Accounts have become more common as more employers are offering these plans. 

Many people already use this tax-free money to pay for the cost of Long-Term Care Insurance, making what is already affordable an even more significant value for many people. 

Yet, some people have not heard about this money-saving opportunity to pay various health-related expenses with pre-tax money. Plus, for those workers aged 55 and older, the IRS allows you to contribute even more money to an HSA.

There is a limit to the eligible amount of money you can use from your HSA to reimburse yourself for Long-Term Care Insurance. The same IRS chart used for eligible tax deductions for qualified LTC Insurance is used for the maximum amount reimbursable if using pre-tax from an HSA.

• Long-Term Care Insurance Tax Deduction Limits Increase for 2024 - IRS Reveals Schedule Based on Age. 

2023 and 2024 HSA Contribution Limits

For 2024 you could contribute $4,150 for individual coverage or $8,300 for family coverage. For those age 55 and older, you are allowed an additional $1,000 contribution for "catch-up."

In 2025, those contribution limits raised to $4,300 for individuals and $8,550 for families. Individuals age 55 and older are still allowed an additional $1,000 contribution to "catch up."

Look for Open Enrollment if You Don't Have an HSA

Do you have an active account now? If not, when your employer's open enrollment for benefits comes out, you may want to consider a health plan which includes an option with a Health Savings Account. 

 You are eligible to participate in a Health Savings Account (HSA) only when you enroll in a high-deductible health plan (HDHP) and meet other requirements.

 HDHPs typically have a higher annual deductible and out-of-pocket maximums with a lower monthly premium. You must first satisfy the annual deductible before the plan pays for a portion of covered services, known as coinsurance. 

Remember, the money inside a Health Savings Account is your money. If you don't use all the money in the account, it stays in your account and earns interest or is invested like an IRA. 

Health Savings Account Advantages

Contributions to the HSA reduce your taxable income. Even if you are self-employed and have a qualified health insurance plan, you have a Health Savings Account.  

• If you're an employee, the money you contribute gets deposited into the account "pre-tax," – so you are not taxed on that amount. Your employer can also make contributions on your behalf, and the contribution and that amount is not included in your gross income.

• Withdrawals for qualified medical expenses, including dental and vision, drugs, and Long-Term Care Insurance premiums are never taxed.

• Interest or investment earnings accumulate tax-deferred and if used to pay qualified medical expenses, are always tax-free.

• You keep the money in your account, and the account is portable if you leave your employer or retire.

• Others can contribute to your HSA. Contributions can come from various sources, including you, your employer, a relative, and anyone else who wants to add to your HSA. However, the amount can never exceed the IRS limits are any tax year.

Qualified Medical Expenses

Examples of qualified medical expenses include (but are not limited to):

• Acupuncture

• Alcoholism treatment

• Ambulance services

• Chiropractors

• Contact lens supplies

• Dental treatments

• Diagnostic services

• Doctor's fees

• Eye exams, glasses, and surgery

• Fertility services

• Guide dogs

• Hearing aids and batteries

• Hospital services

• Insulin

• Lab Fees

• Long-Term Care Insurance premiums

• Prescription medications

• Nursing services

• Surgery

• Psychiatric care

• Telephone equipment for the visually or hearing impaired

• Therapy or counseling

• Wheelchairs

• X-rays

Remember - HSAs are NOT Use it OR Lose it

Remember, unlike flexible spending accounts, you don't have to "use it or lose it" with an HSA each year. In fact, more than three-quarters of HSA account holders withdraw less than they contribute, and roughly a quarter of people don't touch any money from their accounts. This means this pre-tax money is growing and working for you.

Using HSA to Safeguard Retirement Funds with Pre-Tax Money.

More people are aware of the need to plan for the costs and burdens related to aging and declining health. Traditional health insurance and Medicare will not pay for most long-term health care costs.

Long-Term Care Insurance has become a more significant part of retirement planning. When you purchase Long-Term Care Insurance when you are younger and healthier, the premiums are much lower. When you use pre-tax money from an HSA, it makes LTC Insurance even more affordable.

• How Much Does Long-Term Care Insurance Cost?

Long-Term Care Insurance provides you with access to your choice of quality care in the setting you desire without placing an undue burden on your family members. It covers all types of services giving your loved ones time to be family instead of caregivers.

There are a variety of available qualified plans to choose from. A specialist can assist you in obtaining accurate quotes and finding affordable coverage based on your age, health, and family history.

• Types Of Long-Term Care Insurance Policies - What is Best For You.

After Age 65 - Now What?

Once you turn 65, your Health Savings Account still works for you - remember - it is YOUR pre-tax money - growing tax-deferred. 

When you turn 65, you can use the money in the HSA in any way you wish. You are no longer required to use the HSA funds only for qualified health care expenses and Long-Term Care Insurance premiums. 

If you use the money for other things, you will pay the income tax on the funds like you would from any qualified retirement account. Depending on the amount of money in the account, many people continue to use the money for health-related expenses. The money would come out tax-free if used for qualified expenses.

Remember, your health savings account continues to work for you once you retire. HSA distributions can pay for Medicare premiums for Part B, a Medicare Advantage plan (Part C), a prescription drug plan (Part D), and your Long-Term Care Insurance. This money can also be used for Medicare expenses such as copayments and deductibles if you have any (depending on the Medicare Supplement you choose).

Bottom Line

The consequences of aging are a reality that should be addressed before you retire. A Health Savings Account has many advantages, including using pre-tax money to pay your premium.

People need long-term health care for various reasons, including an accident or chronic illness, mobility problems, dementia, and the frailty of aging. We cannot escape these from happening, but you can prepare for them so you can protect assets and reduce family stress.