4 ways HSAs can be used to pay insurance premiums

HSAs carry a triple tax benefit: Account contributions, investment earnings, and withdrawals are tax-free if used for qualified expenses.

Consumers can use HSA funds for a non-qualified purchase, but they will lose some of the three-tier tax benefit. Withdrawals will be taxed as income, similar to how a pre-tax 401(k) or individual retirement account works.

In an ideal world, financial advisors say, consumers would be able to fully fund their HSAs each year and pay current healthcare expenses out-of-pocket, leaving the accounts untouched until retirement.

“Combining your earnings can fund all of your health care when you get older,” said Carolyn McClanahan, a physician and certified financial planner who lives in Jacksonville, Florida.

However, it is not always possible to use HSAs this way; especially for lower and middle income earners who cannot afford these expenses. HSAs are often paired with high-deductible health plans, which can produce large bills for medical care, depending on the plan.

Here are four situations in which HSA funds may be applied to premiums:

Premiums for continuation of health care coverage such as COBRA are counted as qualified expenses, According to the IRS.

COBRA allows people who lose their health benefits due to circumstances such as job loss, reduced work hours, job transitions, death or divorce to temporarily continue their workplace health insurance.

COBRA coverage often allows consumers to keep the same healthcare providers, but coverage is often expensive.

Employees typically pay only a portion of the total premium when employed, with the rest subsidized by their employer. However, with COBRA coverage, individuals may be required to cover the entire premium. up to 102% cost of the plan.

The total average premium for single coverage through a workplace plan in 2023 is $703 per month or $8,435 per year. according to this to KFF, a nonprofit health data provider. For families, this amount is $1,997 per month or $23,968 per year.

Health premiums paid by someone receiving unemployment compensation under federal or state law are also eligible.

These could be COBRA premiums or a health plan purchased under the Affordable Care Act. Market placeFor example.

Medicare premiums for people age 65 and older are also qualified, according to the IRS.

This includes premiums for Parts A (hospital coverage), B (health insurance), and D (prescription drug coverage).

However, premiums for Medicare supplemental health policies such as Medigap plans are not qualified.

“The biggest mistake I keep seeing is people thinking they can use HSAs for Medigap expenses,” McClanahan said.

Medicare beneficiaries do not need to pay premiums directly into an HSA to receive benefits. They could, for example, pay from their Social Security checks or a bank account and then have it reimbursed to them through their HSA, McClanahan said. Keep records and receipts of all these transactions, he advised.

There’s an additional caveat: The IRS said that if the HSA owner is not 65 or older, then Medicare premiums for a spouse or dependent who is 65 or older are generally not qualified.

Consumers can also use their HSAs to pay long-term care insurance premiums.

There is dollar limits on qualified premiums based on age. Here is the breakdown for 2022:

• Age 40 or younger – up to $450
• 41 to 50 years – $850
• 51 to 60 years – $1,690
• 61 to 70 years – $4,510
• Ages 71 and over — $5,640

Age corresponds to the person to whom premiums are paid. Dollar limits are updated every year.

The insurance must be a “qualified long-term care insurance contract” as defined in Article 1. IRS Publication 502.

Ideally, consumers would pay long-term care premiums out of pocket before they retire, McClanahan said. However, if they are retired and now living off their savings, it often makes sense to use an HSA to pay those qualified premiums, he said.