How HSA savings can be used for long-term care in retirement
While on vacation recently, I entered into a discussion with another couple and we shared our career backgrounds. The conversation eventually turned to retirement, and I realized that many people are not aware that health savings accounts can be a key tool for retirement spending.
The cost of healthcare for a married couple during retirement is estimated to range from $250,000 to $400,000. HSA owners can use their HSA savings for qualified medical expenses at any age, but let’s consider a few ways to use these assets in retirement (after turning age 65) and how they are taxed.
- Qualified medical expenses — tax-exempt
- Medicare premiums — tax-exempt
- Qualified long-term care insurance premiums and qualified long-term care services — tax-exempt
- Qualified medical expenses that occurred previously and were paid out of pocket (but after the HSA was established) — 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% penalty tax after age 65
Qualified long-term care
One concern many of us will have during retirement is long-term care. HSA assets can be used for qualified long-term care insurance premiums and qualified long-term care services.
Here are a few 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
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 long-term care services that meet these two requirements: It is required by a chronically ill individual, and it’s 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% of their time cleaning the residence, then that 20% 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.
See also: IRS announces 2019 HSA limits
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.
- The individual is unable to perform at least two activities of daily living without substantial assistance from another individual for at least 90 days, due to a loss of functional capacity. Activities of daily living are eating, toileting, transferring, bathing, dressing, and continence.
- The individual requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment.
Family assistance with home care
So 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 option is available. Following definitions as 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 meeting this requirement, HSA savings could be used for these expenses.
While there is no prohibition against a relative providing these services, I strongly recommend that the HSA owner document and maintain itemized receipts for payment in the event the IRS later questions it.
As you can see, there is flexibility in use of HSA savings beyond the common medical expenses that most people are aware of. Employers, in particular, are well-served to outline to employees how HSAs can be a key financial planning tool for a more secure future.
I can tell you that by the time I finished this conversation with the initial couple, others were listening in. It’s a message that people are looking for.