HSAs, FSAs, HRAs and Long Term Care Insurance

Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), and Health Reimbursement Arrangements (HRAs) are all tax-favored vehicles to pay for health care costs.  Some, though not all, may be used to pay long term care insurance premiums.

Health Savings Accounts

Health Savings Accounts (HSAs) allow taxpayers to claim a tax deduction for qualified medical expenses.  While most insurance premiums cannot be treated as qualified medical expenses for HSA holders, long term care insurance premiums are specifically ALLOWED as a qualified medical expense. This provides an opportunity for many individuals to take a deduction for their long term care insurance premiums, coverage which otherwise would not be deductible.

An HSA is a tax-exempt trust or custodial account set up with a qualified HSA trustee, usually a bank or an insurance company.  Contributions remain in an HSA from year to year, and interest or other earnings in the account are tax-free.  HSAs are portable when an individual changes employment or leaves the work force.  To be eligible for an HSA, an individual must meet several criteria:

  • Be covered under a high-deductible health plan (among several other requirements, for tax year 2013 the minimum deductible for individuals is $1,250; for families $2,500),
  • Have no other health coverage (some exceptions apply),
  • Not be enrolled in Medicare,
  • Not be eligible to be claimed as a dependent on someone else’s tax return.

The maximum allowable HSA contributions for 2013 are $3,250/individual and $6,450/family (exclusive of the $1,000 catch-up contribution for age 55+ participants).

Flexible Spending Arrangements

Flexible Spending Arrangements (FSAs) allow employees to be reimbursed for medical expenses.  FSAs are usually funded through a voluntary salary reduction agreement, and the employer may also contribute.  FSAs are often offered in conjunction with a cafeteria plan, and normally, funds left in the plan at year-end are forfeited.  Self-employed people cannot have an FSA.

Distributions for the purpose of paying long term care insurance premiums are NOT ALLOWED from FSAs.

Health Reimbursement Arrangements

Health Reimbursement Arrangements (HRAs) are funded by employers only, and can be offered with other plans, such as FSAs.

Premiums paid for long term care insurance coverage ARE ALLOWED as qualified medical expenses for HRA purposes.

Whether long term care insurance is purchased for a self-employed individual or for employees, opportunities abound to make its premiums tax-deductible.  Consider Uncle Sam’s contribution as yet another reason why long term care insurance can be a smart component of any comprehensive retirement and financial plan.