COBRA and HSA: Contribution and Payment Rules

The Consolidated Omnibus Budget Reconciliation Act (COBRA) provides a way to temporarily continue your employer-sponsored health coverage. A Health Savings Account (HSA) is a tax-advantaged savings account for medical expenses that is yours to keep regardless of employment status.

The interaction between COBRA and an HSA involves two considerations: using existing HSA funds and making new contributions. Each aspect has its own set of rules and eligibility requirements that determine how you can use your account while on COBRA.

Using HSA Funds for COBRA Premiums

You can use your HSA funds to pay for COBRA premiums. While insurance premiums are not typically considered qualified medical expenses for HSA purposes, the IRS provides an exception for healthcare continuation coverage, which includes COBRA. This means you can withdraw money from your HSA for your monthly COBRA payments without paying income tax or the standard 20% penalty on the withdrawal.

To use the funds, you can pay the premium and then reimburse yourself from the HSA, or use an HSA debit card if the administrator accepts it. Keep detailed records of these transactions for tax purposes. This rule applies to any funds already in your HSA when you enroll in COBRA, and the ability to use this money is not dependent on your eligibility to make new contributions to the account.

HSA Contribution Eligibility with COBRA Coverage

The ability to make new, tax-advantaged contributions to an HSA while on COBRA depends on the health plan you continue. To be eligible to contribute, the IRS requires that you be covered by a qualifying High-Deductible Health Plan (HDHP). If the health plan you continue through COBRA meets this definition, you can make HSA contributions for each month you are enrolled.

To qualify as an HDHP in 2025, a plan must meet four requirements:

• A minimum annual deductible of $1,650 for self-only coverage.
• A minimum annual deductible of $3,300 for family coverage.
• An annual out-of-pocket maximum no higher than $8,300 for self-only coverage.
• An annual out-of-pocket maximum no higher than $16,600 for family coverage.

To determine if your COBRA plan is an HDHP, review the plan’s official documents, like the Summary of Benefits and Coverage. If the information is unclear, contact the COBRA administrator or your former employer’s benefits department for confirmation.

If your COBRA plan does not meet these HDHP criteria, you are not eligible to contribute to your HSA for any month covered by that plan. Contributions made while covered by a non-qualifying plan are considered excess contributions and may be subject to taxes and penalties if not corrected before the tax filing deadline.

Coordination with Other Health Coverage

Even with a qualifying HDHP through COBRA, your ability to contribute can be nullified by other health coverage. HSA eligibility requires that the HDHP be your only health plan, with specific exceptions for permitted coverage like dental or vision. Additional medical coverage that pays for services before you meet the HDHP deductible will make you ineligible to contribute.

Common examples of disqualifying coverage include a spouse’s non-HDHP health plan, a general-purpose Health Care Flexible Spending Account (FSA), or a non-compatible Health Reimbursement Arrangement (HRA).

Enrollment in any part of Medicare is also considered disqualifying coverage. Because Medicare Part A enrollment can be retroactive by up to six months from when you apply for Social Security benefits, you should cease HSA contributions several months before enrolling in Medicare to avoid penalties for excess contributions.

Transitioning Off COBRA Coverage

When your COBRA coverage ends, your HSA eligibility will depend on the type of health plan you transition to. HSA contribution eligibility is determined on a monthly basis, based on your health plan coverage on the first day of each month. This allows for a prorated calculation of your annual contribution limit if you are covered by a qualifying HDHP for only part of the year.

To calculate a prorated contribution, you divide the annual HSA limit by 12 and multiply it by the number of months you were eligible. This calculation applies to both the regular contribution limit and the additional $1,000 catch-up contribution for those age 55 and older.

A provision known as the “last-month rule” offers an alternative. If you are HSA-eligible on December 1st of a given year, you are permitted to contribute the full annual maximum for that year, regardless of how many months you were eligible. However, this rule comes with a “testing period,” which requires you to remain covered by a qualifying HDHP through December 31st of the following year. Failing to meet this requirement can result in the excess contribution becoming taxable income and subject to a penalty.