Are Health Insurance Premiums Deductible From My HSA?

Persons with HSAs or health savings accounts can only use money in the account to pay for insurance premiums in certain situations. Those who recently lost a job and are paying for continuing insurance under COBRA, may do so, as well as people paying for long-term care insurance, people paying for insurance while receiving unemployment and those who over 65 paying for Medicare or other health insurance coverage.

Significance

• The high deductible allows insurance companies to charge lower premiums.

  Health Savings Accounts are tax-preferred plans that allow workers to save about $3,000 per year -- more if they have family coverage -- for future medical expenses. Like a 401k plan, employers deduct money from a paycheck before taxes are taken out, reducing adjusted gross income and thus the worker's tax liability. To qualify for an HSA, a worker must be enrolled in a high-deductible health insurance plan. Such high-deductible plans cost about $11,000 per year, compared to $13,000 for regular insurance plans. But workers must pay high out-of-pocket costs ranging from $2,000 to $11,600 before health insurance coverage begins.

Features

• Because HSA accounts are tax-preferred, the government restricts how the money can be used. HSA account holders can spend the money on any medical expense, including over-the-counter medication. Account holders are often given debit cards that they can use to pay for expenses at drug stores, or to reimburse themselves for cash used for medical expenses.

Considerations

• Using HSA money improperly can lead to higher taxes.

  HSAs are similar to 401k in another important aspect: removing money from them improperly comes with tax penalties. In the case of HSAs, money removed from the account for expenses that do not qualify is taxed at the account holder's normal rate, plus a 10 percent penalty. The penalty will rise to 20 percent in 2011.

Benefits of HSAs

• But HSAs leave other insurance carriers with a higher proportion of sick people, raising costs for them, some say.

  For young, healthy people whose health costs are limited to preventive care, HSA and high-deductible plans offer the opportunity to pay lower annual health insurance costs. HSA benefits roll over from year to year, so a young, healthy person may be able to set aside enough money to cover the annual deductible in years when they have very high health insurance costs, such as when they have children.

Warning

• Spending money from an HSA account is a tough choice. If you are using HSA money to pay for insurance premiums, you may not have enough money to pay your deductible if and when you need medical care.