HSAs offer a trifecta of tax-related gains; to retain them, users must spend the money on allowed healthcare expenditures. Usually payments towards health plans are not valid, however those on Medicare, unemployment, LTC insurance or COBRA can utilize funds from HSAs to pay for premiums.
HSA funds are highly attractive due to their tax advantages, but may only be used for specified medical expenses. A range of expenses, including artificial limbs to birth control pills to lead-based paint removal, falls under this category, as specified by the Internal Revenue Service (IRS). Despite many ongoing medical costs, insurance premiums usually don't make the cut, although there are some exceptions. According to the IRS, four scenarios allow for insurance premiums to qualify.
HSAs offer a tax benefit in three ways: Account contributions are not taxed, neither are investment gains or withdrawals when they are used for eligible expenses. A non-conforming expenditure from an HSA would mean that the user forfeits one of these tax benefits; any withdrawal would be taxed as standard income, akin to what occurs with a 401(k) or IRA.
In an ideal situation, financial advisors advise that consumers should be able to annually fund their HSAs and pay for current health costs out-of-pocket, allowing the accounts to sit untouched until retirement. Carolyn McClanahan, a physician and certified financial planner based in Jacksonville, Florida, explained that the long-term growth from these funds may help pay for medical expenses later on in life. However, not everyone has the ability to set aside money for the future and for those with lower and middle incomes, they may find it difficult to cover medical costs associated with high-deductible health plans. To help, here are four cases in which HSA funds can be used to pay for premiums:
According to the IRS, premiums for COBRA-like health-care continuation coverage are deemed a qualified expense. COBRA enables individuals who experience losses in health benefits due to certain events (e.g., job loss, reduced hours, job transition, death, or divorce) to have temporary access to their former employer's health plan.
COBRA coverage generally enables people to stay with the same medical professionals, yet it is often expensive. Generally, people in employment only bear part of the premium, with the remainder being paid for by their boss. Nevertheless, when opting for COBRA coverage, individuals may be responsible for the full premium, for as much as 102% of the plan rate. According to KFF, a non-profit health data provider, the average premium for single coverage through a place of work plan in 2023 is $703 a month. For families this amounts to $1,997 a month, or $23,968 a year.
Premiums for healthcare that are given to someone collecting unemployment benefits from either federal or state law can also be used. These could be premiums for COBRA or a health plan bought through the Affordable Care Act market, for example.
The IRS states that Medicare premiums for individuals aged 65 and over are eligible expenses, including payments for Parts A (hospital insurance), B (medical insurance) and D (prescription drug coverage). Nevertheless, premiums for Medicare supplemental health policies, such as Medigap plans, are not included.
McClanahan cautioned that Medicare enrollees often make the error of assuming they can use HSAs to cover Medigap expenses. She specified that premiums need not be paid directly with an HSA, but can come from Social Security checks or other bank accounts, with reimbursement made afterwards through the HSA. To ensure accuracy, recipients should maintain records and receipts of all related transactions. Moreover, it's important to note that if the HSA owner hasn't yet reached the age of 65, Medicare premiums for spouses or dependents aged 65 and above are typically not considered qualified expenses for this purpose, in accordance with the Internal Revenue Service.
Customers are able to use their HSAs to cover premiums on long-term care insurance. The allowable amount for qualified premiums is based upon the age of the person for whom the premiums were paid. In 2022, these limits range from $450-$5,640 depending on age. Each year, these caps are updated accordingly. The insurance must meet the qualifications of a "qualified long-term care insurance contract," as indicated in IRS Publication 502. It is recommended that customers finance these premiums with out-of-pocket funds prior to retirement. However, if they are retired and relying on their savings, it generally makes sense to utilise an HSA to pay the qualified premiums.
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