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4 Ways HSAs Can Be Used to Pay Insurance Premiums

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What are HSAs?

HSAs offer a triple tax benefit: Contributions to the account are tax-free, as are investment earnings and withdrawals if used for qualified expenses.

Consumers can use HSA funds for a nonqualified purchase, but they would lose part of the three-tier tax benefit. A withdrawal would be taxed as income, the same way a pre-tax 401(k) or individual retirement account works.

In an ideal world, consumers would be able to fully fund their HSA each year and pay current healthcare costs out of pocket, leaving their accounts intact until retirement, financial advisors say.

“Capitalizing earnings could fund all of your health care when you’re old,” said Carolyn McClanahan, a physician and certified financial planner based in Jacksonville, Florida.

But it’s not always possible to use HSAs this way, especially for low- and middle-income earners who may not be able to afford these expenses. HSAs are typically associated with high-deductible health plans that, depending on the plan, could generate large medical bills.

Here are four instances in which HSA funds can be applied to premiums:

1. COBRA premiums

Premiums for continued health care coverage such as COBRA count as an eligible expense, according to the IRS.

COBRA allows people who lose their health benefits – due to circumstances such as job loss, reduction in hours worked, job transitions, death or divorce – to temporarily maintain their health coverage at work.

COBRA coverage generally allows consumers to keep the same health care providers, but the coverage is often expensive.

When employed, workers typically pay only part of the total premium, with the rest subsidized by their employer. However, with COBRA coverage, individuals may have to pay the entire premium, up to 102% of the plan cost.

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

2. Bonuses during periods of unemployment

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

This could be premiums for COBRA or a health plan purchased on an Affordable Care Act marketplace, for example.

3. Health insurance premiums

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

This would include premiums for Parts A (hospital insurance), B (medical insurance), and D (prescription drug coverage).

However, premiums for Medicare supplemental health policies – such as Medigap plans – do not qualify.

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“The big mistake I see over and over again is people thinking they can use HSAs for Medigap expenses,” McClanahan said.

Medicare beneficiaries do not have to pay their premiums directly to an HSA to receive benefits. They can pay with their Social Security checks or from a bank account, for example, and reimburse themselves later with their HSAs, McClanahan said. Keep records and receipts of all these transactions, she advised.

There is an additional caveat: If the HSA owner is not 65 or older, Medicare premiums for a spouse or dependent age 65 or older are generally not eligible, said l IRS.

4. Long-term care premiums

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

There are dollar limits on eligible premiums based on age. Here is the distribution for 2022:

  • 40 years or younger – up to $450
  • 41 to 50 years old – $850
  • 51 to 60 years old – $1,690
  • 61 to 70 years old – $4,510
  • 71 years or older: $5,640

The age corresponds to the person for whom the premiums were paid. Monetary limits are updated annually.

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

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

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