ComplianceTax & AccountingJune 10, 2016

Health savings accounts – Insurance premiums an eligible expense?

Overview

In addition to allowing an eligible individual the ability to deduct contributions made to his/her Health Savings Account (HSA), distributions are tax free when:

  • Used to pay for or reimburse an HSA owner for qualified medical expenses incurred by him/her, his/her spouse, or his/her tax dependents, and
  • The expenses were incurred after the HSA was established.

Qualified medical expenses

Qualified medical expenses are defined in Internal Revenue Code (IRC) Sections 213(d) and 223(d)(2) as amounts used to pay for the diagnosis, cure, mitigation, treatment, or prevention of disease affecting any structure or function of the body; for transportation costs primarily for and essential to medical care; for qualified long-term care services; prescription medicine and drugs and/or insulin; and for certain insurance premiums.

Health insurance premium costs

The cost of an individual’s health insurance (i.e., the premium amount) is generally not considered a qualified medical expense. However, the cost for certain insurance premiums including those below are eligible to be paid for with a tax free HSA distribution:

  • Qualified long term care insurance contract: These premiums are subject to limits based on age and are adjusted annually by the Internal Revenue Service (IRS). The eligible amount is determined on Schedule A of an individual’s federal income tax return and should be discussed with a tax professional
  • Health care continuation coverage such as COBRA: This applies to an HSA owner, his/her spouse, and/or tax dependents meeting the requirement for that type of coverage
  • Health care coverage while receiving unemployment compensation under federal or state law
  • Medicare and other health coverage for an HSA owner age 65 or older (other than premiums for a Medicare supplemental policy, such as Medigap). However, if an HSA owner is not 65 or older, Medicare premiums for coverage of his/her spouse or a dependent who is age 65 or older is not a qualified medical expense.

Conclusion

Distributions not used to pay or reimburse qualified medical expenses are subject to income tax and an additional tax of 20% unless the HSA owner is age 65 or disabled. Because of the significant tax and penalty amount for non-qualified distributions, anyone interested in using his/her HSA to pay for insurance premiums should consult with his/her tax professional before taking a distribution.

Randy Heidmann
Senior Specialized Consultant, Tax Advantaged Accounts, Compliance Center of Excellence
With more than 40 years of industry experience, Randy Heidmann has helped hundreds of financial organizations create, implement and maintain their tax-advantaged accounts programs.