Can You Pay Insurance Premiums for an HDHP From an HSA?

According to IRS regulations, money from an HSA can only be spent on health insurance premiums when a person is receiving federal unemployment benefits, is paying for health insurance benefits through COBRA, or is 65 years or older and is using the money to pay for Medicare or Medigap. Under these circumstances, you may pay for health insurance premiums with HSA funds. Otherwise, you cannot do so without risking a penalty.

Basics of High Deductible Plans

• HDHP insurance products are also known as high deductible plans. They cost about $11,000 per year for family coverage in 2010, compared to $13,000 per year for traditional insurance. But they feature higher out-of-pocket costs. Families may spend as much as $11,000 per year before the insurance company begins to pick up the tab.

HSA Basics

• Health Savings Accounts are tax-favored savings trusts. With HSA's, workers set aside a portion of their pre-tax income for future medical expenses. HSA's lower adjusted gross income, and therefore a person's tax bill. To be eligible for an HSA, a worker must be enrolled in a high deductible health insurance plan. Many companies contribute money to an employee's HSA account to help pay for the high deductibles their workers will face.

Qualified Expenses

• In exchange for the tax benefits, the IRS restricts how HSA funds can be spent. The IRS says that HSA funds can only be spent on qualified medical expenses. Insurance premiums are not qualified, except in the situations described above. IRS Publication 502 describes expenses that can be considered qualified medical expenses. Such expenses include doctors visits, along with abortion, acupuncture and ambulance rides.

Penalties

• Many firms make it extremely easy to spend HSA funds by distributing debit cards to account holders. These can be used to pay for doctors visits. They may also be used at any business that accepts the card, even for non-qualified medical expenses. Such expenses are called withdrawals from an HSA account. Withdrawals are considered income and are taxed as such. They also face an additional 10 percent penalty.