Can Tax-Free HSA Withdrawals Be Used to Pay Health Insurance Premiums?

Health savings accounts, or HSAs, are like 401(k) plans for health care: A worker diverts a portion of his pre-tax income to the HSA, which reduces his adjusted gross income. HSAs can bear interest, and some can earn returns on the stock market. These gains are tax-free. In return for these tax benefits, however, you can only spend HSA funds on qualified medical expenses, which usually do not include health insurance premiums. Withdrawals from an HSA for unqualified expenses are taxable as income, and may also incur a penalty.

Eligibility

• To qualify for an HSA, a worker must be enrolled in a high-deductible insurance plan. These plans cost less than traditional medical insurance (about $11,000 per year, as of 2010, compared to $13,000 per year for family coverage). However, high-deductible plans have higher out-of-pocket expenses. Workers may have to pay the full price of doctor's visits until they meet the deductible.

Considerations

• Under traditional health insurance plans, the insurance carrier pays the bill when you visit the doctor, even if your visit is for a minor cold or headache. However, health care costs --- and insurance premiums --- rose faster than inflation between 1999 and 2009, eating up a larger and larger share of the economy. Some policy makers believe that forcing insured consumers to spend their own money (e.g., through high-deductible plans) encourages them to shop around for less expensive treatments, skip doctor visits when they are unnecessary, and generally use less health care. The assumption is that younger, healthier workers will be able to save enough money in an HSA to cover high deductibles in years when they have significant medical costs.

Statistics

• High-deductible plans with HSAs are a growing segment of the health insurance industry. A 2009 count by America's Health Insurance Plans, an insurance industry trade group, found that more than 8 million Americans had high-deductible plans. That's up from 6.1 million in the previous year, and 4.5 million in 2007.

Insurance Premiums

• Workers cannot use HSA funds to pay the premiums of their high-deductible plans on a tax-free basis. However, you can use HSA funds to pay for health insurance premiums in select circumstances. As of 2010, recently unemployed people can use HSA funds to pay premiums if they are receiving unemployment compensation, or continuing coverage under COBRA. Persons over 65 can use the funds to pay for Medicare coverage. You may also be able to use HSA funds to pay for long-term care premiums, subject to annually adjusted restrictions based on age.

Qualified Expenses

• The list of qualified medical expenses is pretty broad, but it is changing as of 2010. In 2011, you will no longer be able to use HSA funds for over-the-counter medication. However, you can spend HSA funds tax-free on acupuncture, abortion, preventative doctor's visits and prescription medications. Regular doctor's visits also qualify, but vitamins and supplements do not. The complete list of qualified expenses appears in IRS Publication 502 (see References).