Can HSA Be Used for COBRA Premiums?

A Health Savings Account (HSA) is a tax-advantaged savings account created for individuals covered under high-deductible health plans (HDHPs) to save for medical expenses. The funds contributed are not subject to federal income tax at the time of deposit. The Consolidated Omnibus Budget Reconciliation Act (COBRA) provides certain former employees, retirees, spouses, and dependent children the right to temporary continuation of health coverage at group rates. This article explores the specific circumstances under which you can use your HSA funds to pay for COBRA premiums.

IRS Rules for Using HSA Funds for COBRA

The Internal Revenue Service (IRS) provides guidance on what constitutes a qualified medical expense for Health Savings Accounts. Generally, insurance premiums are not considered qualified expenses, meaning you cannot use your HSA funds to pay for them. This rule prevents using HSA dollars for standard health insurance premiums for an active employee.

However, there are specific exceptions where the IRS permits using HSA funds for insurance premiums. One of these exceptions is for health care continuation coverage under COBRA. This allows individuals who have lost their job and elected COBRA to pay those premiums directly from their HSA without tax or penalty.

This provision is outlined in IRS Publication 969. The publication clarifies that while most premiums are excluded, payments for COBRA coverage are a permitted use of HSA funds. Other exceptions include premiums for long-term care insurance, health coverage while receiving unemployment benefits, and certain Medicare premiums.

Required Documentation for Proof of Payment

When you use your HSA to pay for COBRA premiums, you are responsible for proving it was a valid, qualified medical expense. In an IRS inquiry or audit, you must have records to substantiate the distributions from your account. Failure to provide adequate proof can result in the distribution being treated as taxable income, plus a 20% penalty if you are under age 65.

Your documentation should start with the COBRA election notice from your former employer. You must also retain the premium statements issued by the COBRA administrator, which detail the exact amount due for the coverage period.

Finally, you need proof of payment linking your HSA to the premium expense, such as canceled checks, bank or HSA statements showing the transaction, or a receipt from the administrator. If you pay the premium out-of-pocket and reimburse yourself from the HSA, you must keep both the proof of premium payment and the record of the HSA distribution.

The Process for Paying Premiums and Tax Reporting

You can pay COBRA premiums using your HSA funds directly. Most HSA administrators provide a debit card or checks that can be used to pay the premium to the COBRA provider.

A common method is to pay the premium with personal funds and then take a tax-free reimbursement from your HSA. You can initiate a distribution from your HSA custodian for the amount you paid. There is no time limit for reimbursing yourself for a qualified medical expense, as long as the expense was incurred after the HSA was established.

At the beginning of the year, your HSA custodian will send you Form 1099-SA, which reports the total amount of money you took out of your HSA. You are responsible for accounting for these distributions when you file your federal income tax return.

You will use the information from Form 1099-SA to complete IRS Form 8889, “Health Savings Accounts (HSAs).” On this form, you report your total distributions and specify the amount used for qualified medical expenses, which includes COBRA premiums. Properly reporting these distributions ensures they remain tax-free.

Other Insurance Premiums Allowed as HSA Expenses

Health Coverage During Unemployment

The IRS permits using HSA funds to pay for health insurance premiums while you are receiving federal or state unemployment compensation. This rule applies whether you purchase a plan through the health insurance marketplace or another source. The requirement is the concurrent receipt of unemployment benefits, as the payments are only qualified for the weeks you receive this compensation.

Long-Term Care Insurance

You can use your HSA to pay premiums for qualified long-term care (LTC) insurance. These policies cover services for individuals who are chronically ill. The amount of the premium that can be treated as a qualified medical expense is subject to annual, age-based limits that the IRS adjusts for inflation, with the deductible amount increasing for older age brackets.

Medicare Premiums

Individuals age 65 or older can use HSA funds to pay for certain Medicare premiums. You cannot use HSA funds to pay for Medigap supplemental insurance policy premiums. Eligible premiums include:

• Medicare Part A (if applicable)
• Medicare Part B (medical insurance)
• Medicare Advantage plans (Part C)
• Medicare Part D (prescription drug coverage)