Can an HSA Be Used for Long-Term Care Costs?

An HSA is a savings account attached to a high deductible health plan (HDHP) — a health insurance plan with a high minimum deductible.^[01,02] Unlike a flexible spending account (FSA), funds in an HSA roll over from year to year, allowing it to accumulate value over time through direct contributions and/or mutual fund investments made from within the account. Account holders can contribute as much money into the account as they prefer up to the yearly contribution limit. And, some employers even make contributions on behalf of their employees as an incentive for those employees to set up and fund an HSA.

Advantages of an HSA

HSAs are not available to everyone — e.g., those on Medicare — and may not be an available tool to many seniors on the threshold of long-term care. But for individuals with a few working years left, there are advantages to opening an account early and giving it time to grow:^[03]

• Money in an HSA is deducted from a paycheck before taxes are calculated. This means account holders don’t have to pay income taxes on those deposited funds and can use an HSA to lower their taxable income.
• Account holders can use HSA funds at any time for qualified medical expenses.
• HSA funds earn tax-free interest.
• Accounts are portable, meaning they remain with an account holder if they leave the employer that sponsored an account.

Investing within the HSA

HSA account holders can also invest HSA savings in stock market-linked securities from within the account. This is an often-underused feature that can make HSA accounts a great option if one is looking to grow a dedicated health care fund over time in a tax-free environment. Note that investing is a good choice for account holders who plan to keep at least a portion of the money in their account for many years and will not touch it until age 65. And, investing may not be a feasible option for someone who regularly needs deposited funds for routine care.

Angela Grimes, operations director and investment executive of Raymond James Financial Services in Fort Lauderdale, Florida, is well-versed in the intricacies of HSA accounts. She believes investing is a way for account holders to grow their funds if they are prepared to let the money sit.

“I would encourage people to invest it … I don’t think a lot of people do,” Grimes says.

The money in an HSA can be used for any qualified medical expenses — including long-term care costs — for you or your dependents. And, care needs like home modifications, wheelchairs and walkers, and even service animals may be covered. Qualified expenses can include the following and more:^[03]

• Copays
• Prescriptions
• Ambulatory assistance equipment
• Dental and vision costs
• In-home caregiver services

It’s important that the HSA account holder only use the funds for qualified medical expenses. The list of qualified expenses is updated each year by the IRS. If an account holder uses HSA funds for a non-approved expense, the IRS will penalize the account holder 20% of the amount and add the amount to the account holder’s annual taxable income. If the account holder is over 65 and uses the money for a non-qualified expense, the 20% penalty is waived, but the funds are still considered taxable income.

Can HSAs be used to pay for long-term care?

Insurance premiums are typically not a qualified medical expense, unless the premiums are for the following:^[03]

• Long-term care insurance
• Health care continuation coverage (like COBRA)
• Health care coverage while on unemployment
• Medicare and other health care coverage for individuals 65+

Because an HSA can be used to pay for long-term care insurance premiums, it can be used to pay for long-term care facilities like assisted living, memory care, and skilled nursing through long-term care insurance. An HSA may also cover some long-term care expenses if an individual has a letter of medical necessity (LMN) from their doctor, verifying their need for long-term care.

Let our care assessment guide you

There are several instances where you can use HSA funds on your claimed dependents. Look into the filing status of the family member you care for to see if your HSA can pay for their medical needs, especially if they don’t have an HSA account of their own. If they can qualify as your dependent, you can use your HSA to pay for some of their care costs.

In cases where your loved one is not a dependent, there may still be options. For example, if your spouse has an HSA, they can make you an authorized user and/or beneficiary and you can use the HSA for your needs and theirs. In other cases, such as when an adult child is caring for an elderly parent, that child may need to have durable power of attorney to be authorized to use the HSA funds on the parent’s behalf. Individuals can learn more on this IRS resource page.

There are four criteria an individual must meet to be eligible for an HSA:^[03]

• Be enrolled in an HDHP
• Have no other insurance coverage
• Cannot be claimed as a dependent by anyone
• Cannot be enrolled in Medicare

It is advised a person open an HSA as soon as the requirements are met, Grimes says. Because there is an annual contribution limit, the account incurs the greatest benefit when it has many years to grow. For 2023, individuals can contribute up to $3,850 and families can contribute up to $7,300, according to the IRS.^[03]

Closer to retirement, the benefits of opening an HSA drastically decrease. The annual contribution limits make it difficult to grow the account, even if you reach the maximum contribution every year before retirement. And, after enrolling in Medicare, you can no longer contribute to your HSA, making it wise for you to begin the HSA long before retirement, Grimes notes.

Talk with a Senior Living Advisor

As the loved ones in your life approach the age where they may be considering senior care costs, it is important to sit down with them and discuss financial plans. The beauty of an HSA is that it can be used for many types of qualified medical expenses. So, even though your loved one will likely not be able to pay for all of their senior care with their HSA, they may still be able to pay for a portion of their expenses with the account.

The earlier a person opens an HSA, the more money they may have available when they need high-cost care later in life. Even if you or your loved one does not have many years of growth associated with an HSA account, some ancillary costs can still be covered with those HSA funds. Senior care can get expensive fast, so make sure to take advantage of all financial avenues available.

Once you decide to use an HSA to pay for senior care costs, a Senior Living Advisor at A Place for Mom can help answer questions about your next steps.