Health insurance is a top priority for most of us, but premiums and out-of-pocket medical bills can leave your wallet thinner. Health savings accounts help by providing a way to pay for qualified medical expenses with tax-free dollars. However, there are only a few situations in which you can use HSA money to pay insurance premiums.
While you probably can't pay your regular health insurance premiums using HSA funds, you may be able to use the money for COBRA and Medicare payments. If you're receiving unemployment benefits, that's another exception.
Understanding Health Savings Accounts
An HSA is a tax-advantaged savings account, meaning the dollars you put in are tax-exempt. The money put into the account may be in the form of pretax contributions made by you and/or your employer. If an HSA at work isn’t an option, you can start your own at a bank or other financial institution and make tax-deductible contributions.
You can put money in an HSA up to the amount of your health insurance deductible or the annual IRS limit, whichever is less. As of 2019, the IRS limits were $3,500 for yourself or $7,000 for a family coverage plan.
Paying Health Insurance Premiums
You usually don’t get to use HSA dollars to pay your health insurance premiums, but there are a few exceptions. You can pay premiums out of your HSA if you are receiving unemployment benefits or making COBRA payments to maintain your insurance coverage after leaving a job. If you have money left in an HSA after you turn 65, you can use it to make Medicare payments.
Paying Other Medical Costs
Almost any medical cost not covered by your insurance can be paid with HSA dollars. Qualified expenses include hospital bills, doctor’s visits, prescription drugs and physical therapy. Items like crutches, eyeglasses and acupuncture are eligible.
You can’t use HSA dollars for over-the-counter drugs unless a doctor prescribes them, with the exception of insulin. Using HSA funds for anything other than a qualified item makes the money taxable, and the IRS sticks you with a 20 percent penalty in addition to taxing the money involved.
Exploring HSA Requirements
To be eligible to open a health savings account, you have to have a high-deductible insurance plan, and you can’t have any other health insurance coverage. The money you add to the HSA doesn’t have to be used the year you put it in – it can be rolled over for use in future years.
The money can be used for your own medical bills and for those of your spouse or dependents. You can also include someone you could have claimed as a dependent on your tax return but who filed a joint return or earned too much money. This also applies to someone you didn’t claim because someone else claimed you as a dependent.
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