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Are Health Insurance Premiums Eligible Under My HSA?

Health Savings Accounts, or HSAs, come with significant tax benefits that can increase a consumer's buying power and lower his tax bill. But with those benefits come restrictions from the IRS. Consumers can only use HSA funds on "qualified" medical expenses. Health insurance premiums, according to the IRS, are not qualified medical expenses, except in a few narrow circumstances.

  1. Circumstances

    • HSA funds can be used to pay for health insurance benefits when a person is unemployed and is receiving federal health insurance compensation. Workers can also use HSA funds to pay for continuing insurance under COBRA. Persons over 65 can use the money to pay for Medicare, medigap or other insurance. Long-term care insurance is also eligible.

    Basics

    • To qualify for an HSA account, workers must be enrolled in a high-deductible insurance plan. These plans feature higher out-of-pocket costs--families may spend up to $11,000 before insurance kicks in. But they feature lower premiums --about $11,000 per year for family coverage in 2010 compared to $13,000 for traditional insurance. HSA accounts carry over from year to year. Workers contribute to them on a pre-tax basis, which lowers adjusted gross income. The hope is that workers can save enough in their HSA account to cover the high out-of-pocket costs.

    Penalties

    • Spending money from an HSA is easy. Many firms give workers debit cards that they can use at a doctor's office. But with that ease comes perils. Any money from an HSA that is not spent on a qualified medical expense is a withdrawal. Withdrawals are taxed as income and are subject to an additional 10 percent penalty.

    Qualified Expenses

    • Qualified expenses are described in IRS Publication 502. Abortion, acupuncture and ambulance rides all count as qualified expenses, as do routine doctor's visits. It is important to note that qualified expenses may not be the same as expenses incurred for the purposes of meeting your deductible. For example, if you have a high deductible plan with a $5,000 deductible, you may be able to purchase some things with your HSA--a heating pad recommended by your doctor, for example--that may not count toward your deductible.

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