Can I Use an HSA to Pay for Health Insurance Premiums?
Key takeaways:
Your health savings account (HSA) can be used to pay for many medical expenses approved by the Internal Revenue Service. This includes qualified health insurance premiums.
Premiums paid for COBRA, Medicare, and long-term-care insurance may be HSA eligible.
All qualified health insurance premiums that are covered by an HSA are tax free.
Health savings accounts (HSAs) are a common way to plan for future healthcare expenses. You can use the money in the account to pay for qualified medical expenses, such as deductibles and dental expenses.
Under certain circumstances, you may be eligible to use your HSA to pay for health insurance premiums. This includes premiums related to COBRA, Medicare, and long-term-care insurance. And if you lose your job, you may be eligible to use money in your HSA to cover your health insurance premiums even if you’re receiving unemployment benefits.
How does an HSA work?
If you have a qualified high-deductible health plan, you can contribute money to an HSA.
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This type of account lets you set aside pretax dollars, invest your funds, and withdraw tax-free money for eligible medical expenses. Unlike a flexible spending account, funds in your HSA don’t expire at the end of the year. You can roll over unused HSA dollars. You can use your funds to pay for HSA-eligible medical expenses during retirement, including Medicare insurance premiums.
Which insurance premiums qualify under HSA?
HSAs can pay for copays, coinsurance, deductibles, and other qualified medical expenses. Typically, health insurance premiums aren’t HSA-eligible expenses, but the Internal Revenue Service (IRS) has exceptions for premiums that fall under the following categories.
COBRA premiums and other healthcare continuation coverage
The Consolidated Omnibus Budget Reconciliation Act, or COBRA, enables people to temporarily continue their workplace health coverage after experiencing a job loss or another qualified event. Since COBRA and other healthcare continuation coverage premiums are considered a qualified medical expense, you can use your HSA to pay for them.
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COBRA is the same insurance you had from an employer, but it costs more because the employer isn’t splitting the cost with you. You have to pay the entire premium yourself, plus a service fee of up to 2%.
Medicare premiums
HSAs can come in handy to cover some of Medicare’s major out-of-pocket costs. You can use your account to pay for qualified medical expenses not covered by Medicare, including premiums.
If you’re age 65 or older, your HSA can cover the following Medicare premiums:
Medicare Part A premiums (hospital insurance)
Medicare Part B premiums (medical insurance)
Medicare Part D premiums (prescription drug coverage)
Most people won’t have to worry about paying a premium for Medicare Part A. If you had Medicare taxes deducted from your paycheck for at least 10 years, you may be eligible for premium-free Part A. If you don’t qualify, you’ll have to pay a monthly premium for Part A coverage.
Premiums for Medicare supplemental policies, such as Medigap, are not HSA-eligible expenses. You’ll have to pay income tax on money you withdraw to fund nonqualified expenses.
Although you can use your HSA to pay for Medicare premiums, you will not be able to make additional contributions to an HSA after you enroll in Medicare.
Long-term-care insurance (deduction limits based on age)
Many patients with chronic conditions or cognitive disorders rely on long-term care to meet their basic needs. As you age, you may also need the service of a caregiver to assist with daily activities. Premiums for long-term-care insurance can be expensive. And Medicare and private health insurance may not cover the costs of long-term care.
You can use HSA funds to pay premiums for qualified long-term-care insurance, but then the entire amount of your monthly premium may not be tax deductible. The amount of money you can withdraw tax free to cover long-term care will depend on your age. The following table details the deduction limits for 2024 and 2023 based on your age.
Age (before the end of the tax year) | Maximum deduction allowed for 2024 | Maximum deduction allowed for 2023 |
40 or under | $470 | $480 |
41-50 | $880 | $890 |
51-60 | $1,760 | $1,790 |
61-70 | $4,710 | $4,770 |
71 or older | $5,880 | $5,960 |
Health insurance premiums paid while receiving unemployment benefits
The IRS does not allow you to use your HSA to pay for regular health insurance premiums, but there is an exception for unemployed individuals. If you lose your job, you may qualify to withdraw funds from your HSA to cover your health insurance premiums. You must receive federal or state unemployment benefits or COBRA for your premiums to be considered an eligible expense.
If you’re not sure if an expense is HSA eligible, call your HSA administrator. They can help you determine if your premiums and other expenses would be approved. The IRS provides a complete list of qualified expenses. You should consult with your certified public accountant or tax adviser to help you navigate your situation.
How much of my HSA funds are tax free?
HSAs offer three unique tax benefits that distinguish them from other accounts. First, you can contribute tax-free money to your HSA. By contributing to an HSA, you’ll reduce your taxable income for the year. Then you can invest money while it’s in your HSA. You won’t have to worry about paying taxes on any interest, dividends, or capital gains you earn. Also, all money that you withdraw to pay for qualified health insurance expenses will be tax free.
Keep your receipts, and document your expenses. This will help you get reimbursed for all HSA-eligible expenses. You may also be eligible to deduct health insurance premiums on your tax returns.
If you withdraw money from your HSA to pay for nonqualified expenses, you will have to pay a penalty. As you can see from the chart below, you won’t pay any penalties if you withdraw your money for nonqualified expenses after turning 65.
Withdrawal for | How much will you pay in taxes? |
Qualified medical expense (under 65) | $0 |
Qualified medical expense (65 and over) | $0 |
Nonqualified medical expense (under 65) | Ordinary income tax rate + penalty |
Nonqualified medical expense (65 and over) | Ordinary income tax rate |
The bottom line
HSAs can be used to pay for qualified health insurance premiums, including Medicare, COBRA, and long-term-care insurance. Anytime you use your HSA to cover eligible expenses, you’ll get triple tax benefits that can save you money. Make sure you understand HSA rules to maximize your benefits.
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References
Healthcare.gov. (n.d.). High deductible health plan (HDHP).
Internal Revenue Service. (2021). 26 CFR 601.602: Tax forms and instructions.
Internal Revenue Service. (2022). Part III: Administrative, procedural, and miscellaneous.
Internal Revenue Service. (2023). 2020 Publication 502.
Internal Revenue Service. (2023). Internal Revenue Bulletin: 2023-48.
Internal Revenue Service. (2023). Publication 969 (2020), health savings accounts and other tax-favored health plans.
Internal Revenue Service. (2024). Publication 502 (2023), medical and dental expenses.
Medicare.gov. (n.d.). What’s Medicare?
This article is solely for informational purposes. This article is not professional advice concerning insurance, financial, accounting, tax, or legal matters. All content herein is provided “as is” without any representations or warranties, express or implied. Always consult an appropriate professional when you have specific questions about any insurance, financial, or legal matter.
