HSAs have a triple tax advantage: Contributions to the account are tax-free, as are investment earnings and withdrawals when used for qualified expenses.
Consumers can use HSA funds for non-qualified purchases — but they lose a prong of the three-tier tax benefit. A withdrawal is taxed as income, similar to the way a pre-tax 401(k) or individual retirement account works.
In an ideal world, consumers could fully fund their HSA each year and pay for current health expenses out of pocket, leaving the accounts untouched until retirement, according to financial advisors. .
“Combining incomes can fund all of your health care when you’re older,” says Carolyn McClanahan, a physician and certified financial planner, based in Jacksonville, Florida.
But it’s not always possible to use HSAs that way — especially for low- and middle-income earners who may not be able to afford the costs. HSAs are often paired with high-deductible health plans that, depending on the plan, can generate large bills for medical care.
Here are four cases where HSA funds can be used for premiums:
Premiums for continuing health care such as COBRA count as an eligible expense, according to the IRS.
COBRA allows people who lose health benefits — due to circumstances such as job loss, reduced work hours, job transfer, death or divorce — to keep their workplace health coverage temporarily. that basis.
COBRA coverage usually allows consumers to continue with the same health care providers, but the coverage is often expensive.
When employed, workers generally pay only a portion of the total premium, with the rest subsidized by their employer. With COBRA coverage, however, individuals must cover the entire premium, up to 102% of the plan’s cost.
The overall average premium for coverage through a workplace plan in 2023 was $703 a month, or $8,435 a year, according to KFF, a nonprofit health data provider. For families, it’s $1,997 a month, or $23,968 a year.
Health premiums paid by a person receiving unemployment benefits under federal or state law are also eligible.
These could be premiums for COBRA or a health plan purchased in an Affordable Care Act marketplace, for example.
Medicare premiums for people age 65 and older also qualify, according to the IRS.
This will include premiums for Parts A (hospital insurance), B (medical insurance) and D (prescription drug coverage).
However, premiums for additional Medicare health policies — such as Medigap plans — are not eligible.
“The big mistake I see all the time is people think they can use HSAs for Medigap expenses,” McClanahan said.
Medicare beneficiaries do not have to pay their premiums directly into an HSA to receive the benefit. They can pay from their Social Security checks or from a bank account, for example, and pay themselves into their HSAs later, McClanahan said. Keep records and receipts of all these transactions, he advises.
There is an additional caveat: If the HSA owner is not 65 years or older, then Medicare premiums for a spouse or a dependent 65 or older generally do not qualify, the IRS said.
Consumers can also use their HSAs to pay for long-term care insurance premiums.
There are dollar limits on qualifying premiums based on age. Here’s the 2022 breakdown:
- Age 40 or younger — up to $450
- Ages 41 to 50 — $850
- Age 51 to 60 — $1,690
- Age 61 to 70 — $4,510
- Age 71 and over—$5,640
Age corresponds to the person for whom the premiums are paid. The dollar limits are updated annually.
The insurance must be a “qualified long-term care insurance contract,” as defined in IRS Publication 502.
In fact, consumers pay out of pocket for their long-term care premiums before they retire, McClanahan said. However, it generally makes sense to use an HSA to pay these qualifying premiums if they are retired and currently living off their savings, he said.