Health Savings Accounts (HSAs) are a fantastic tool for saving money on medical expenses –– but health insurance premiums don’t qualify as a medical expense under HSA rules.
If you try, you’ll have to pay income taxes on the entire withdrawal. If you’re under age 65, you’ll also face a severe 20% penalty on any amount you withdraw to pay health insurance premiums or any other qualified expenses.
That’s one of the more draconian penalties in the tax code. And it’s specifically designed to dissuade you from using your HSA to pay for health insurance premiums. Congress aims to compel you to use other money instead to pay for health insurance.
Why You Can’t Use Your HSA to Pay for Health Insurance Premiums
Health savings accounts are designed to cover qualified medical expenses—doctor visits, prescriptions, surgeries, and even some dental and vision care.
But health insurance premiums are a different story:
The IRS does not allow you to use HSA funds for premiums because most health insurance premiums are already tax-deductible.
If you were to use your HSA to pay health insurance premiums, you’d essentially be wasting the HSA tax benefit.
Instead, it’s a much better idea to pay for your health insurance premiums directly.
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Tax Treatment of Health Insurance Premium
Generally, you should qualify for an income tax deduction for any premiums you pay directly.
(If your employer pays most or all of your health insurance premiums, the money they pay is not taxable income to you in the first place.)
If you’re an independent contractor and you buy your own health insurance, your health insurance premiums are an above-the-line deductible expense. That means you don’t have to itemize to claim the deduction.
“Withdrawing funds now to pay non-qualified expenses like health insurance premiums could leave you with less money later, when healthcare costs will likely be even higher than they are today.”
By paying your health insurance premiums directly and not using your HSA, you’ll avoid the 20% penalty that comes with non-qualified withdrawals for HSA owners under age 65. And you’ll also keep your HSA intact –– and compounding tax-deferred and possibly tax-free for other expenses that may come along down the road.
This tax-advantaged growth can be very powerful over long periods of time.
And once you reach age 65, the 20% penalty goes away! At that point, any assets in your HSA that you haven’t already spent on medical expenses become available to supplement your retirement income, or for any other purpose you wish, penalty-free.
You just pay the same income taxes on the withdrawal that you would with any other tax-deferred savings account, such as a traditional IRA or 401(k).
Learn More: What Is an HSA Qualified Expense?
BEWARE: The Long-Term Opportunity Cost of Using Your HSA to Pay for Insurance Premiums
If you are under age 65 and you use your HSA funds to pay for health insurance premiums, you will face the 20% penalty.
You’ll also face immediate income tax liability on the amount withdrawn.
But that’s not all: You’ll alsomiss out on years of tax-deferred or (if you use the money for qualified medical expenses), even tax-free growth on that money.
That’s money you could be using later in life for healthcare expenses in retirement!
Think about it… withdrawing funds now to pay non-qualified expenses could leave you with less money later. Meanwhile, healthcare costs will likely be even higher than they are today.
For the vast majority of people, it’s generally a much better strategy to leave your HSA alone to accumulate interest and grow over time. If possible, let your money compound until you can deploy it to pay tax and penalty-free for qualified medical expenses.
That’s the most tax-efficient way to use your HSA by far.
❗Tip: Try to reserve your HSA for medical expenses or qualified long-term care insurance premiums if possible––at least until you turn 65.
Can I Use My HSA to Pay for Long-Term Care Insurance Premiums)?
While regular health insurance premiums are off-limits, there’s an important exception; you can use your HSA to pay for qualified long-term care insurance (LTCi) premiums.
Long-term care insurance is important because it helps cover expenses related to assisted living, nursing homes, or in-home care, which can become essential as you age. These are things that Medicare does not pay for in most circumstances.
And without additional protection in place, long-term care costs can be devastating. According to the Genworth Cost of Care study, they amounted to more than $100,000 per year for skilled nursing facilities in many areas.
Congress doesn’t want people to be driven to destitution by long term care costs (and forced onto Medicaid). Therefore, the law allows you to pay a portion of qualified long term care insurance premiums with your HSA without penalty.
It’s a great way to prepare for the future and make the most of your HSA benefits.
Learn More: What Is an HSA-Qualified Expense?
Let Your HSA Work for You
Your HSA is a valuable asset that can grow into a significant part of your retirement strategy if you let it.
The longer you leave it untouched (except for qualified medical expenses), the more it grows through tax-free compounding. Over the years, this can add up to a substantial amount of money. This is money that can be better used tax-free for qualified healthcare expenses.
Instead of spending your HSA funds on health insurance premiums—where the tax benefit is already built in— consider letting your HSA compound uninterrupted. Use it strategically to cover qualified medical expenses, or save it for your retirement years, when you’ll likely need it most.
Learn More: How Much Could Your HSA Be Worth One Day?
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Need Help? Contact a Personal Benefits Manager (PBM)
If you have questions about your health insurance planning or long-term care insurance, it’s always a good idea to consult with an expert.
Our Personal Benefits Managers at HSA for America can help guide you.
Interested in learning more about long-term care insurance and how it fits into your healthcare strategy? Our PBMs can assist you in finding the right LTCi plan for your family and budget.
Don’t hesitate to contact a PBM today for a free consultation!
HSAs are a great financial tool, but don’t use them to pay for your health insurance premiums—unless you’re willing to take a 20% hit. Pay your premiums out of pocket, take the tax deduction, and let your HSA grow.
If you’re interested in long-term care insurance, your HSA can help cover those premiums. Contact a Personal Benefits Manager at HSA for America to get expert advice tailored to your needs.
For Further Reading
Hi! I’m Mike Montes, and I’m one of your Personal Benefits Managers. I like working with HSA for America because we’re creating solutions to healthcare problems. Our focus on money-saving alternatives like HSA plans and health sharing programs, and the variety of health share programs we offer, are what set us apart. Read more about me on my Bio page.
