Health Savings Accounts

Many people approaching retirement have money in a Health Savings Account (HSA), built up through a high-deductible health plan at work. Because HSA money is meant for medical costs, families often assume Medicaid will ignore it. Usually it does not. Under the SSI rules most states follow, an HSA is generally a countable asset because the owner can withdraw the money for any purpose. This guide explains how HSAs are treated and how to use one wisely before applying for Long-Term Care Medicaid.

Figures change periodically. Double-check current amounts before relying on them.

What an HSA is

An HSA is a tax-advantaged account for people covered by a high-deductible health plan. Contributions are tax-deductible or pre-tax, growth is tax-free, and withdrawals for qualified medical expenses are tax-free. Money can be withdrawn for other purposes too, though it is taxable, and before age 65 it also carries a 20% tax penalty.

Once a person enrolls in Medicare, they can no longer contribute to an HSA, but they can keep the account and spend the money.

How Medicaid counts an HSA

Under SSA’s rules for SSI, which most states use:

• An HSA is generally a countable resource, because the owner can withdraw funds for any purpose, not only medical expenses.
• An HSA is excluded only if access is restricted, for example by the trustee, so that funds can be used solely for qualified medical expenses.
• Withdrawals from the HSA are not counted as income; they are a conversion of an existing resource.

In practice, most HSAs are countable. Some states value them at the amount that could be withdrawn, minus any penalty. Each state guide notes any special treatment.

Medical Savings Accounts (MSAs), including Medicare Advantage MSAs, are treated similarly.

Using an HSA in a spend-down

Because HSA money spent on qualified medical expenses is tax-free, it is often the best money to spend first when a person must reduce assets. Qualified medical expenses include many costs that also make sense in a spend-down:

• long-term care services for a chronically ill person under a plan of care (generally qualified medical expenses under tax rules);
• nursing home costs when the main reason for being there is medical care;
• Medicare premiums (Parts A, B and D, and Medicare Advantage), though not Medigap premiums;
• qualified long-term care insurance premiums, within IRS age-based limits;
• hearing aids, dentures, eyeglasses and dental work;
• medical equipment, such as a wheelchair or hospital bed;
• home modifications primarily for medical care, such as ramps or grab bars, to the extent they do not raise the home’s value;
• prescription drugs and copays.

Check IRS rules (Publication 502 lists medical expenses) for any particular expense, and keep receipts.

Reimbursing past expenses

A useful feature of HSAs: the owner can reimburse themselves, tax-free, for qualified medical expenses paid out of pocket any time after the HSA was opened, as long as the expense was not already reimbursed or deducted. People who saved receipts for years can withdraw that amount tax-free. For Medicaid purposes, the withdrawn money becomes ordinary cash, which is still countable and must be spent down. But it can be spent on allowed items without the tax a non-medical withdrawal would cause.

A worked example

Patricia, 68, has $28,000 in an HSA and $9,000 in savings. She needs nursing home care and lives in a state with a $2,000 asset limit.

• The HSA is countable, so her total countable assets are $37,000.
• She uses the HSA first for qualified expenses: her nursing home bill (her care is primarily medical), new hearing aids, dental work and Medicare premiums. These withdrawals are tax-free.
• She uses her savings for an irrevocable funeral contract and personal items.
• When her total countable assets are under $2,000, she applies.

Had she used savings first and left the HSA for later, she might have ended up taking non-medical withdrawals from the HSA, which are taxable.

Married couples

If the spouse at home has an HSA, it is generally a countable asset of the couple and goes into the CSRA calculation. The spouse at home can use their own HSA for their own medical expenses or for the ill spouse’s qualified expenses, since spouses’ medical expenses qualify.

What about inherited HSAs?

If an HSA owner dies and the spouse is the beneficiary, the HSA becomes the spouse’s HSA. For any other beneficiary, the account ends and its value is taxable income to the beneficiary in the year of death. For a beneficiary on Medicaid, this is like an inheritance: income in the month received and an asset afterward. See Receiving an inheritance.

Naming an HSA beneficiary

Review the beneficiary designation. Naming a person on Medicaid as beneficiary can disrupt their eligibility. Naming a spouse continues the HSA. Naming an estate can make the account subject to probate and, in some states, estate recovery.

Common questions

Is an HSA like an IRA for Medicaid? Both are often countable. States treat retirement accounts in various ways, but an HSA is usually treated like a bank account.

Can I keep my HSA if I spend it only on medical costs? Not as an exempt asset unless access is legally restricted to medical expenses. Simply intending to use it for medical costs is not enough.

Are HSA withdrawals counted as income? Under SSI rules, no. They are a conversion of a resource.

Does it matter if I’m under 65? Non-medical withdrawals before 65 carry a 20% penalty. A state may value the HSA net of the penalty.

What if my employer still contributes? Contributions add to the countable balance. Once on Medicare, contributions must stop.

Steps to take

1. Get a current HSA statement.
2. Gather receipts for past unreimbursed medical expenses.
3. Plan to use the HSA first for qualified medical expenses in a spend-down.
4. Review the HSA beneficiary designation.
5. Talk with a Certified Medicaid Planner (CMP) and a tax professional about timing.

Key terms

Timing an HSA spend-down

A few timing points can save money:

• Medicare enrollment ends contributions. Contributions must stop the month Medicare coverage begins. Some people who delay Medicare continue to contribute; when they enroll, Part A coverage can be retroactive up to six months, so stop contributions in time to avoid a tax penalty.
• Withdraw before the asset test date. If the state tests assets on the first of the month, withdrawals for qualified expenses should be completed before then.
• Avoid prepaying far ahead. Paying many months of nursing home costs in advance may be questioned. Pay current bills.

HSA vs. other countable money

Because HSA money is tax-free for medical costs and IRA money is taxable, many families spend from the HSA first for medical items and care, and from savings for non-medical purchases such as a funeral contract, before touching an IRA.

Documentation

Keep, for each HSA withdrawal:

• the receipt or invoice for the medical expense;
• proof that it was not reimbursed by insurance;
• the HSA statement showing the withdrawal.

These records satisfy both the IRS and the Medicaid caseworker, who will want to see where the money went.

Restricting access to make an HSA exempt

The SSI rules exclude an HSA only when access is legally restricted to qualified medical expenses, for example by the account’s trustee. Most HSA custodians do not offer such a restriction, and an owner’s own promise to use the money only for medical costs is not enough. Families should not count on this exclusion without written confirmation from the custodian and the state that the restriction meets the rule.

The bottom line

Treat an HSA as countable money with a tax advantage for medical costs. Use it early in a spend-down, keep the receipts, and name beneficiaries with Medicaid in mind. A CMP can fit it into the full plan.

Related guides

• What counts as an asset?
• Retirement accounts
• Allowed and not-allowed purchases
• Exempt assets

Last updated for 2026. General information only, not legal or financial advice. Medicaid Answers is a free educational resource published by Medicaid Answers Foundation.