Medicare MSA plans allow Medicare beneficiaries to pay qualified medical expenses with Other Peoples’ Money.
Even better, they let you do it tax-free.
And under certain circumstances, you can even use your Medicare MSA funds to help pay for qualified long-term care insurance premiums.
Here’s how it works:
Background
Traditional Medicare does not typically cover long-term care services.
Medicare primarily focuses on acute care and short-term rehabilitation, not long-term custodial care for people with chronic conditions that aren’t expected to improve.
That’s why we recommend most people purchase long term care insurance – to help protect them against the potentially devastating cost of assisted living or nursing home care later in life.
Long term care insurance premiums can seem expensive. But they are much more affordable for most people than paying out of pocket for nursing home care costs that can easily exceed $80,000 per year and more in some areas.
The good news is that you can, under certain circumstances, use your Medicare MSA or health savings account (HSA) money to pay for long-term care insurance premiums, tax and penalty free.
But you need to understand the rules, or you could face needless taxes and penalties.
This blog is primarily for people who have a Medicare MSA account and who own or are considering purchasing long term care insurance.
Using an MSA to Pay Insurance Premiums – The General Rule
MSAs, like health savings accounts, can only be used to pay for certain qualified medical expenses, as defined in IRS Publication 502.
Insurance premiums are normally not considered qualified medical expenses. But the tax code contains several exceptions. These include:
- Long-term care insurance.
- Health care continuation coverage (such as coverage under COBRA).
- Health care coverage while receiving unemployment compensation under federal or state law.
- Medicare and other health care coverage if you were 65 or older (other than premiums for a Medicare supplemental policy, such as Medigap).
The amount of long term care insurance premiums you can count as qualified medical expenses are limits based on your age and are adjusted annually.
For Tax Year 2023, the limits are as follows:
2023 Long Term Care Premium Limits for HSAs, MSAs, and Schedule A Qualified Medical Expense Deductions
| Age | Annual Premium Limit |
|---|---|
| 40 or younger | $480 |
| 41 to 50 | $890 |
| 51 to 60 | $1,790 |
| 61 to 70 | $4,770 |
| 71 and older | $,5960 |
Note that under current law, long term care insurance premiums are also tax deductible, along with other qualified medical and dental expenses.
But to take advantage of the medical expense deduction, you need to itemize on Schedule A. Which doesn’t make sense for everyone. Many people are better off taking the standard deduction rather than itemizing.
By using your MSA, HSA, or both to pay for long-term care insurance premiums, you can pay your long-term care insurance premiums with tax free dollars. And still potentially keep the benefit of taking the standard deduction, if that is what makes the most sense for you.
IRS Publication 969 – Health Savings Accounts and Other Tax Favored Health Plans
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What is a Medicare Advantage Medical Savings Account?
A Medicare Advantage Medical Savings Account (MSA) is a type of Medicare Advantage plan that combines a high-deductible health plan (HDHP) with an Archer medical savings account.
It offers a unique way to manage your healthcare costs and savings.
MSA Advantages include flexibility in healthcare spending, potential tax advantages, and the ability to control your healthcare funds and priorities.
How does an MSA work?
With an MSA, a specific amount is deposited into your medical savings account annually.
You can use these funds to pay for eligible medical expenses before the deductible is met. Once the deductible is satisfied, the HDHP coverage begins.
Unlike with HSAs, you can’t contribute to your MSA yourself. Contributions can be made only by Medicare. The contributions aren’t included in your income, and so aren’t taxable. Distributions from a Medicare Advantage MSA that are used to pay qualified medical expenses aren’t taxed.
If the money is withdrawn for anything other than a qualified medical expense, it would be subject to income tax plus a 50 percent penalty.
What are eligible expenses you can use an MSA for?
Eligible expenses include deductibles, copayments, coinsurance, and certain healthcare services not covered by Medicare.
Dental, vision, and hearing care are common examples of eligible expenses.
Certain kinds of long-term care insurance premiums are also allowable as eligible expenses for your MSA. See below for full details.
Using Your MSA for Long-Term Care Insurance Premiums
You can include in medical expenses amounts paid for qualified long-term care services and certain amounts of premiums paid for qualified long-term care insurance contracts.
To use your MSA to pay for long-term care insurance premiums, you’ll need to follow a few steps.
First, ensure that your long-term care insurance policy is considered a qualified medical expense under IRS guidelines. If it is, you can use your MSA to pay for the premiums.
Is my long term care insurance plan qualified?
Not all long term care insurance premiums are qualified medical expenses.
For your premium payment to be allowable, your long term care insurance policy must meet the following criteria:
- It must be a stand-alone long-term care insurance policy.
MSA funds typically cannot be used for a “hybrid” policy that combines long term care benefits with life insurance or an annuity. These can be very useful tools for retirement planning. But the premiums do not count as a qualified medical expense. - The long-term care policy must be tax-qualified.
The long-term care insurance policy must be considered tax-qualified under the IRS guidelines. These policies generally adhere to specific requirements set by the federal government to qualify for certain tax advantages, including potential eligibility for MSA funds. The contract must:- Be guaranteed renewable;
- Not provide for a cash surrender value or other money that can be paid, assigned, pledged, or borrowed;
- Provide that refunds, other than refunds on the death of the insured or complete surrender or cancellation of the contract, and dividends under the contract must be used only to reduce future premiums or increase future benefits; and
- Generally not pay or reimburse expenses incurred for services or items that would be reimbursed under Medicare, except where Medicare is a secondary payer, or the contract makes per diem or other periodic payments without regard to expenses.
- The withdrawal must be below the plan’s limit for LTC insurance premiums.
Certain MSA plans may impose limitations on the amount of MSA funds that can be used towards long-term care insurance premiums. Review the terms and conditions of your MSA plan to understand any limitations on premium payments. - Age-Related MSA rules.Some MSA plans have age restrictions on using funds for long-term care insurance premiums. Check with your Medicare Advantage plan or your MSA plan administrator to determine if there are any age-related criteria for eligibility.
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How to Use Your MSA to Pay for Long Term Care Insurance Premiums
Follow this step-by-step process.
- Contact your insurance provider and let them know you plan to use your MSA to pay for your premiums. They will provide you with the necessary paperwork to submit to your MSA custodian.
- Submit the paperwork to your MSA custodian, along with a request to withdraw funds to pay for the premiums.
- Once the withdrawal is approved, the funds will be transferred directly to your insurance provider to pay for the premiums.
Conclusion
Using your MSA benefits for long-term care insurance premiums can be a smart way to cover these costs while also reducing your taxable income.
Remember to check the annual withdrawal limits and ensure that your policy is considered a qualified medical expense before making any withdrawals. With proper planning, your MSA can be a valuable tool in your retirement healthcare strategy.
Any questions? Just want to look around at your options and make sure you’re in the very best plan for your situation? That’s what we’re here for! Our experienced Personal Benefits Managers can analyze your situation and help you select the best possible health plan for your needs.
Where that’s a Medicare Advantage MSA plan, another Medicare Advantage plan, a Medigap, or the cost-saving Medi-Share 65+ healthsharing plan, we can help you choose the optimal plan for your individual circumstances.
And then coach you on getting the most possible value out of it.
For a free, no-obligation consultation and recommendation, just click here to make an appointment.
Here are some additional blogs on the topic: Medicare MSAs or the Medi-Share 65+ Healthsharing Plan – Which is Better for Medicare Beneficiaries? | How To Invest Your Medicare MSA Plan Money | Can You Spend Your Medicare MSA Money on Nutritional Supplements?
Here are some additional pages related to this article: Medicare Medical Savings Account (MSA) | Medicare Advantage Plans
Frequently Asked Questions About Medicare Advantage MSAs, Qualified Long Term Care Insurance Premiums, and Qualified Medical Expenses
What is a Medicare Advantage MSA?
A Medicare Advantage MSA (Medical Savings Account) is a type of Medicare Advantage plan that combines a high-deductible health plan with a medical savings account.
It allows you to use MSA funds to pay for eligible medical expenses.
How does a Medicare Advantage MSA work?
With an MSA, a specific amount of money is deposited into your medical savings account annually.
You can use these funds to pay for eligible medical expenses tax free before the deductible is met. Once the deductible is satisfied, the high-deductible health plan coverage begins.
What are the advantages of Medicare Advantage MSAs?
Medicare Advantage MSAs offer flexibility in healthcare spending, potential tax advantages, and the ability to control your healthcare funds.
They can be an appealing option for those seeking a unique approach to managing their healthcare costs.
What are the disadvantages of Medicare Advantage MSAs?
The main disadvantages of MSAs include high deductibles, limited coverage options, and the risk of making non-qualified purchases that may lead to tax penalties and loss of funds.
Can I use MSA funds to pay for long-term care insurance premiums?
Yes, you may be able to use MSA funds to pay for long-term care insurance premiums if the policy meets specific IRS criteria for qualified long-term care insurance.
What is qualified long-term care insurance?
Qualified long-term care insurance is a type of insurance policy that meets certain requirements set by the IRS. It provides coverage for necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services related to a chronically ill individual’s condition.
Only qualified long term care insurance premiums are eligible to be paid using MSA money without incurring a penalty.
What are the criteria that make a long-term care insurance policy eligible for MSA funds?
To be eligible for MSA funds, the long-term care insurance policy must be a stand-alone policy that meets the requirements of qualified long-term care insurance according to IRS guidelines.
Hybrid life insurance/LTC policies and annuity/LTC contracts are not eligible.
Are there age-related eligibility criteria for using MSA funds for long-term care insurance premiums?
Some MSA plans may have age restrictions on using funds for long-term care insurance premiums.
It is essential to review the specific guidelines of your MSA plan to determine if there are any age-related criteria for eligibility.
Can I use MSA funds to pay for long-term care expenses if I have a chronic illness?
While MSA funds can be used to pay for eligible medical expenses, including those related to a chronic illness, using them for long-term care expenses depends on the specific terms of your MSA plan and IRS guidelines.
Is long-term care covered under original Medicare?
No, original Medicare typically does not cover long-term care services.
Medicare primarily focuses on acute care, short-term rehabilitation, and medically necessary services.
Can I use MSA funds to pay for home healthcare services?
If the home healthcare services are considered eligible medical expenses and meet IRS guidelines, you may be able to use MSA funds to cover these costs.
Can I use MSA funds to pay for assisted living facility expenses?
MSA funds may be used for eligible medical expenses, but coverage for assisted living facility expenses may depend on the specific services provided and IRS guidelines.
Are long-term care insurance premiums tax-deductible?
Long-term care insurance premiums may be tax-deductible under certain circumstances, but eligibility depends on IRS regulations and individual tax situations.
What happens if I make a non-qualified purchase with MSA funds?
Making non-qualified purchases with MSA funds can result in tax penalties and potential loss of account funds.
It is crucial to understand eligible expenses and guidelines to avoid unintended consequences.
Can I contribute additional funds to my Medicare Advantage MSA?
No, you cannot contribute additional funds to your Medicare Advantage MSA.
The account is funded annually by the plan, and you cannot make additional contributions beyond the plan’s funding.
Lou Spatafore works for MediGap Advisors. As a PBM, his focus is to help people find the best Medicare plan for his clients. Read my full Bio.