How to Use HSA to Help Clients Pay For Long-Term Care Insurance Premiums

  • Originally published January 17, 2012 , last updated April 26, 2017

Do you have clients who own a Health Savings Account (HSA) or are eligible to open one? They may be able to use pre-tax dollars from the account to pay for all or part of their long-term care insurance premiums. Using a HSA to pay for LTCi premiums may be an attractive option for your clients who are not eligible to deduct their premiums as either a self-employed person or an unreimbursed medical expense on their federal income tax return.

HSA Eligibility

The first step is to verify that your client has an existing HSA or is eligible to open one. The general qualifications are as follows:

  • The individual must be covered by a high-deductible health plan. A high-deductible health plan has an annual deductible of at least $1,200 for individuals and $11,900 for families (2011 limits, adjusted for inflation).
  • Even if an individual has a high-deductible health plan, he or she cannot contribute to an HSA if they are also covered under a non-high-deductible health plan or a plan that duplicated benefits of their own plan, such as a spouse’s plan through the spouse’s employer, claimed as a dependent on another’s income tax return, or covered by Medicare.

HSA Contribution Limits

  • For 2011, the maximum annual contribution amount is $3,050 for individuals and $6,150 for families (limits decreased by aggregate contributions to an Archer MSA.)
  • Eligible individuals over age 55 may also make additional catch-up contributions each year. The catch-up contribution amount for 2011 is $1,000. This amount is currently not scheduled for inflation adjustments in future years.

HSA Tax Considerations

  • Employer HSA contributions are not included in the employee’s income (pre-tax). This includes contributions to an employee’s HSA by their employer using the amount of the employee’s salary reduction made through an IRC §125 cafeteria plan.
  • An individual can take an above-the-line deduction for eligible contributions they make to their HSA.
  • Any growth inside an HSA is tax-free if withdrawls are made for qualified medical expenses.
  • Distributions that are not made for qualified medical expenses are included in taxable income and are subject to a 20% penalty tax (non-qualified distributions prior to 2011 were subject to 1-% penalty tax). The penalty tax does not apply if the distributions are made after death, disability, or attaining age 65.

Other HSA Considerations

  • If the HSA is funded by employer contributions, the employer must comply with the “comparability” requirements of IRC §4980E3.
  • If an individual is eligible to contribute to an HSA on the first day of the last month of the tax year (December 1, for most people), they can make the full annual contribution. If an individual is no longer eligible on that date, their contributions apply pro rata based based on the number of months during the year they were eligible.
  • An individual may make a one-time tax-free transfer (trustee-to-trustee) from their traditional or Roth IRA to their HSA in the amount of the maximum deductible contribution they could make to their HSA (IRC §408(d)(9)).
  • Unlike Flexible Spending Accounts, HSA balances are not forfeited if now withdrawn by the end of the year.

Using an HSA to Pay LTCi Premiums

Qualified LTCi premiums are a qualified medical expense. As a result, an individual may withdraw money tax-free from their HSA to pay qualified LTCi premiums. Qualified LTCi premiums are the eligible premiums, therefore, only the qualified LTCi premiums may be withdrawn tax-free from an HSA.


John Doe owns an HSA and contributed $3,000 to it in 2011.

John also owns a LTCi policy. His annual premiums are $2,500. His eligible age-based premiums are $1,270. Because John’s eligible premiums are a qualified medical expense for HSA purposes, he may withdraw up to $1,270 tax-free from his HSA in 2011 to pay towards his LTCi premiums. The balance of his LTCi premium, $1,230, is not a qualified medical expense, and he may not withdraw HSA funds to pay for it or otherwise deduct it.

Using a HSA to pay for LTCi premiums can be an attractive option for some of your clients, but make sure they understand the tax considerations and other limitations.


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