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What are HSAs?
HSAs offer a triple tax advantage: Account contributions are tax-free, as are capital gains and withdrawals when used for qualified expenses.
Consumers can use HSA funds to make a nonqualified purchase — but they would lose some of the three-tier tax benefit. A withdrawal would be taxed as income, similar to how a pre-tax 401(k) account or individual retirement account works.
In an ideal world, consumers would be able to fully fund their HSA each year and pay ongoing health care costs out of pocket, with the accounts remaining untouched until retirement, according to financial advisors.
“Compounding income could fund all of your retirement health care,” said Carolyn McClanahan, a physician and certified financial planner based in Jacksonville, Florida.
However, it’s not always possible to use HSAs in this way — especially for low- and middle-income earners who may not be able to afford these costs. HSAs are typically combined with high-deductible health insurance plans, which can result in high medical care bills depending on the plan.
Here are four cases in which HSA funds can be applied to premiums:
1. COBRA Awards
Premiums for continuing health insurance such as COBRA are considered a qualified expense. according to the IRS.
COBRA allows people who lose health insurance benefits – due to circumstances such as job loss, reduction in work hours, job change, death or divorce – to temporarily maintain their health insurance at work.
COBRA coverage typically allows consumers to keep the same health care providers, but coverage is often expensive.
When hired, employees usually only pay a portion of the total premium; the rest is subsidized by their employer. However, with COBRA coverage, individuals may be required to pay the full premium, up to 102% of the cost of the plan.
According to KFF, a nonprofit health data provider, the average total premium for individual insurance under a workplace plan in 2023 is $703 per month, or $8,435 per year. For families it’s $1,997 per month or $23,968 per year.
2. Bonuses during unemployment
Health premiums paid by someone receiving unemployment benefits under federal or state law are also eligible.
For example, this could be premiums for COBRA or a health insurance plan purchased through an Affordable Care Act marketplace.
3. Medicare premiums
According to the IRS, Medicare premiums also qualify for people age 65 and older.
This includes premiums for Parts A (Hospital Insurance), B (Medical Insurance), and D (Prescription Drug Insurance).
However, premiums for supplemental Medicare health insurance plans – such as Medigap plans – do not qualify.
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“The big mistake I see all the time is that people think they can use HSAs for Medigap expenses,” McClanahan said.
Medicare beneficiaries do not have to pay their premiums directly to an HSA to receive the benefit. For example, they can pay from their Social Security checks or from a bank account and reimburse themselves later using their HSAs, McClanahan said. Keep records and receipts of all such transactions, she advised.
There is another caveat: Unless the HSA holder is 65 or older, Medicare premiums for a spouse or dependent who is 65 or older generally do not qualify, according to the IRS.
4. Care premiums
Consumers can also use their HSAs to pay long-term care insurance premiums.
There are dollar limits on qualified awards based on age. Here is the breakdown for 2022:
- Age 40 or younger – up to $450
- Ages 41 to 50 – $850
- Ages 51 to 60 – $1,690
- Ages 61 to 70 – $4,510
- Age 71 and over: $5,640
The age corresponds to the person for whom the premiums were paid. Dollar limits are updated annually.
The insurance must be a “qualified nursing care insurance contract” as defined by IRS Publication 502.
Ideally, consumers would pay their long-term care premiums out of pocket before they retire, McClanahan said. However, it generally makes sense to use an HSA to pay these qualified premiums if they are retired and living off their savings now, she said.
Source : www.cnbc.com