Overview
Health Savings Accounts (HSAs) are one of the few truly triple-tax-advantaged savings vehicles: tax-deductible contributions, tax-deferred growth, and tax-free distributions for qualified medical expenses. That tax advantage extends to many long-term care (LTC) costs — but only when you follow IRS rules on what counts as a qualified expense. This article explains what LTC costs HSAs can cover, how the rules and limits work, common pitfalls, and practical strategies I use in client planning.
(For current IRS guidance, see IRS Publication 969 and IRS FAQs on HSAs. For plain-language overviews, see Healthcare.gov and AARP.)
Which long-term care expenses can HSA dollars pay?
HSAs can be used tax-free to pay for:
- Qualified long-term care services that meet the IRS definition of a medical expense, including necessary diagnostic, preventive, therapeutic, curing, mitigating, or rehabilitative services related to a chronic illness or disability. Documentation should support the medical necessity (physician orders, care plans, facility invoices).
- Long-term care insurance premiums up to IRS age-based limits when the premiums qualify as medical expenses. These limits are adjusted periodically; confirm the current amounts with the IRS.
The authority on these rules is IRS Publication 969 (Health Savings Accounts) and related sections of the Internal Revenue Code. Healthcare.gov and AARP also summarize how HSAs interact with long-term care planning [IRS Pub. 969].
Key rules and timing you must know
- Eligibility to contribute: You must be covered by a qualified high-deductible health plan (HDHP) and otherwise eligible to make HSA contributions. Once you enroll in Medicare, you can no longer contribute to an HSA for months after Medicare coverage starts (you can still spend existing funds). See IRS Pub. 969 for details.
- Qualified expense test: To be tax-free, an HSA distribution must pay for a qualifying medical or long-term care expense. Keep receipts, care provider statements, and physician orders. The IRS may require proof if questioned.
- Nonqualified distributions: Withdrawals for nonmedical items are taxable and, if taken before age 65, subject to a 20% penalty. After age 65, nonmedical withdrawals are taxable as ordinary income but not subject to the 20% penalty.
- Coordination with other programs: Spending HSA funds to pay down assets can affect Medicaid eligibility if you later apply. Also, using HSA funds to pay certain family members or caregivers can raise related-party and substantiation issues.
Long-term care insurance premiums and HSAs
HSA dollars can pay LTC insurance premiums that meet the IRS definition of medical expense, but the tax code caps how much of those premiums qualify depending on your age at the end of the tax year. Those age-based limits are updated periodically, so verify the current numbers on the IRS website before relying on them for planning. If you expect to use HSA funds to pay LTC insurance premiums, document the policy, premium invoices, and insurer statements.
Documentation and recordkeeping (critical)
If you plan to use HSA funds for LTC costs, treat recordkeeping as a priority:
- Save invoices that identify services, dates, and the provider.
- Keep physician notes or a care plan showing the medical necessity of skilled or custodial services when applicable.
- Retain proof of premium payments for LTC insurance.
- If you ever reimburse yourself from the HSA for past expenses, keep a contemporaneous paper or digital file showing the date the care was provided and the date of reimbursement.
In my practice I advise clients to keep a dedicated folder (or secure cloud folder) for HSA-related records. The IRS does not require you to file receipts with your return, but you must be able to produce them if audited.
Practical strategies and trade-offs
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Build the HSA early and invest for growth: An HSA kept invested can grow substantially by retirement and cover long-term care costs without depleting IRAs or 401(k) balances. This is often one of the most tax-efficient ways to pre-fund healthcare in retirement. See our guide on using HSAs before and during retirement for deeper tactical ideas: How to Use an HSA Strategically Before and During Retirement.
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Use HSA for high-value qualified care first: If you face a choice between spending HSA funds now or letting them compound, analyze the marginal tax benefit and the expected LTC need. For some clients, preserving HSA assets for future LTC needs is the priority.
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Consider LTC insurance plus HSA: For clients who can afford premiums, an LTC policy can protect assets from catastrophic care costs; use HSA funds to pay premiums up to IRS limits. Compare this combination with self-funding scenarios — see Long-Term Care Planning Basics to evaluate options.
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Time distributions carefully around Medicare: Once you enroll in Medicare you cannot continue HSA contributions; some clients delay Part A enrollment (risky and complex) or manage timing of retirement to maximize HSA contributions. Coordination with Medicare requires care; we refer clients to a Medicare/HSA specialist when planning.
Common mistakes and risks
- Treating HSAs as a bank account rather than a long-term investment: HSAs provide outsized tax benefits when used as a retirement medical fund. Spending them early for nonessential items reduces long-term value.
- Poor documentation: Most HSA mistakes arise from lack of substantiation. Without invoices and physician statements, you risk taxability and penalties on distributions claimed as medical.
- Ignoring Medicaid implications: Using HSA funds or converting assets without professional advice can complicate later Medicaid planning because of asset and income tests.
- Overreliance on HSA for every LTC scenario: HSAs may not fully cover prolonged, high-cost LTC needs. Evaluate hybrid LTC policies, long-term care annuities, and other funding vehicles as part of a diversified plan.
Example scenarios
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Conservative savers: A 60-year-old client invests an HSA consistently, lets the balance grow, and uses distributions for intermittent home health care in their late 60s. Because each distribution paid for qualified services and the client kept solid records, the withdrawals were tax-free and preserved their retirement portfolio.
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Coordinated policy use: A married couple uses an LTC hybrid policy to cover catastrophic costs and uses HSA funds to pay premiums and small home-care bills. The combination preserved liquidity and minimized taxable IRA withdrawals.
These are representative scenarios from my 15+ years advising clients; outcomes depend on the specifics of coverage, tax filing, and state law.
How to check current limits and rules
Tax law and IRS tables (for HSA contribution limits and age-based caps on LTC insurance premiums) are updated periodically. Before you make decisions that rely on numeric limits (contribution caps, premium deduction limits, etc.), check:
- IRS Publication 969, Health Savings Accounts: https://www.irs.gov/pub/irs-pdf/p969.pdf
- IRS pages on medical and dental expenses and LTC insurance rules (linked within Pub. 969)
- Healthcare.gov for plain-language HSA summaries: https://www.healthcare.gov/
- AARP’s HSA resources for retirement-related LTC issues: https://www.aarp.org/
Also review our related FinHelp articles for planning context:
- How to Use an HSA Strategically Before and During Retirement: https://finhelp.io/glossary/how-to-use-an-hsa-strategically-before-and-during-retirement/
- Long-Term Care Planning Basics: https://finhelp.io/glossary/long-term-care-planning-basics/
- HSA Contribution Limits (FinHelp glossary): https://finhelp.io/glossary/hsa-contribution-limits/
Bottom line
HSAs can be a highly effective component of long-term care funding when used correctly. They allow tax-free payment of many LTC services and certain LTC insurance premiums, but the rules are specific: you must meet the IRS definition of qualified expenses, maintain documentation, and understand timing around Medicare and other public benefits. In many cases I advise clients to combine an HSA strategy with other LTC planning tools rather than rely on a single source of funding.
Professional disclaimer: This article is educational and general in nature. It is not individualized tax, legal, or financial advice. For personalized planning, consult a qualified tax professional, elder-law attorney, or financial planner who can review your full situation.
