Tag Archives: Qualified Medical Expenses

Paying for Health Insurance Premiums with HSA Funds

This question was submitted by HSA Edge reader Laura. Feel free to send in your question today to evan@hsaedge.com.

I was forced into early retirement and the company COBRA was outrageously expensive. I went to the marketplace and found a plan with Anthem. I have been paying for the coverage with HSA funds. Is this an eligible (covered) expense? I am not receiving unemployment benefits.

How to Pay for Premiums with HSA

It is unfortunate that HSA funds cannot be used for insurance premiums except in extenuating circumstances involving job loss. While it is possible this law will change in the future, currently it is not the case. Even so, the rules for paying insurance premiums while unemployed are strict. Long term care and Medicare are included, as is continuing health coverage such as COBRA. If those don’t apply, you can pay for health insurance while on unemployment benefits from the state/federal government. This clause explicitly requires being on state/federal unemployment compensation. Unfortunately this is usually the only real option as continuing coverage via employer sponsored COBRA insurance is excessively expensive.

The IRS spells this out when insurance premiums are considered qualified medical expenses in IRS Publication 969:

Insurance premiums. You can’t treat insurance premiums as qualified medical expenses unless the premiums are for:

  • Long-term care insurance
  • Health care continuation coverage (such as coverage under COBRA)
  • Health care coverage while receiving unemployment compensation under federal or state law
  • Medicare and other health care coverage if you were 65 or older (other than premiums for a Medicare supplemental policy, such as Medigap)

That leaves most people going back to the market place for coverage. In theory, you can pay for any health insurance premium using HSA funds, but you must be unemployed. Specifically these premiums are a qualified medical expense if you are receiving federal or state unemployment compensation. I believe they do this as their filter for who is truly unemployed seeking assistance. So if you lose your job, you can sign up for any health insurance you want, and if you are receiving unemployment benefits, you can pay for the expenses with your HSA. This is part the strategy of building up your HSA to use as an unemployment safety net, as it does provide some flexibility for your funds if you lose your job.

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HSA Expenses Incurred Before Opening Account

Opening an HSA

The timing of opening your Health Savings Account –going to a bank and actually creating an account in your name– ends up being quite important for your finances. The reason is the date you open your Health Savings Account is the date that qualified medical expenses begin for you. Any medical care incurred before you open your HSA does not count as a qualified medical expense. Said another way, you cannot use pre-tax dollars to purchase medical care that occurred before you actually created your Health Savings Account. Per IRS Form 969:

For HSA purposes, expenses incurred before you establish your HSA aren’t qualified medical expenses. State law determines when an HSA is established.

It is actually easier than most people think to open up a Health Savings Account. The main difficulty comes in choosing a provider. Things I look for are low fees, online banking ability, phone app, and investment options. Once you find the financial institution you wish to bank with, you need to apply for the account. While this sounds painful, it is actually quite simple. To open the HSA, they will need standard information such as name and address, and also some information about your health insurance. They will use this to validate that you do in fact have an HDHP, and also use your self-only or family coverage for a rough determination of your contribution limit for the year. They use that information to help prevent contribution mistakes and it aides in generating Form 5498-SA and Form 1099-SA. Once you submit that, you are all set, and you can begin making contributions to your HSA.

The cost of not opening an HSA

You must overcome the tendency to delay opening your HSA, as it could come back to bite you. If you have HSA eligible insurance but have not yet opened a Health Savings Account you may be on borrowed time, as any medical expense incurred cannot be paid with pretax dollars. The risk to you can be equal to the (amount of expense) x (your tax rate). Even a $100 expense for someone in a 25% tax bracket will end up costing them $33 extra. Said another way, it takes $133 dollars taxed at 25% to pay for a $100 medical expense. For an HSA holder, they only need to earn $100 to pay for the expense. Multiply this expense by 10 and this $1,000 expense will cost you $333 in extra tax dollars paid, all of which is completely avoidable. This money adds up and there is no reason to pay it with the generous HSA contribution limits.

Effect on Contribution Limit

While opening the actual Health Savings Account begins the process of allowing qualified medical expenses, it does not have an effect on your contribution limit for the year. Your contribution limit is based on when you are an eligible individual. So you can have HSA eligible insurance and be allowed to contribute to your not-yet-open HSA. Of course, you will need to open that Health Savings Account before you make that year’s contribution.

Take the following scenarios as an example:

HSA coverage begins HSA opened QME begin Contribution Limit Last Month Rule?
January 1st June 1st June 1st Full N/A
January 1st January 1st January 1st Full N/A
June 1st June 1st June 1st 1/2 up to full Optional
June 1st October 1st October 1st 1/2 up to full Optional

As you can see above, delaying in opening your HSA can prevent you from paying for medical care from your HSA. If you plan on contributing to an HSA you might as well open the account as soon as possible, to take advantage of paying for medical care tax free with the HSA.

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Can I Spend HSA Funds on My Spouse or Children?

Overview

One question that pops up fairly regularly is, “On whom can I spend my HSA funds?”. You have gone through all of the right steps of selecting HDHP coverage, opening an HSA, and making contributions to your HSA. You know that you need to spend you HSA dollars on qualified medical expenses, but whose medical expenses can be paid for with HSA dollars? In other words, we are defining what is a qualified medical expense, just the “who” part.

Luckily, there are three groups of people on whom can spend your Health Savings Account. In other words, these people receive benefits from your HSA, whether they are actually on your HSA insurance or not. Per IRS Publication 969:

Qualified medical expenses are those incurred by the following persons:

  1. You and your spouse
  2. All dependents you claim on your tax return
  3. Any person you could have claimed as a dependent on your tax return (see exceptions)

So while your family may not be covered by your HSA eligible insurance, they are at least covered by your HSA dollars.

You and your Spouse

Intuitively, we know that you can spend your HSA funds on yourself. Heck, you insured yourself, opened the HSA, contributed the funds; I sure hope you can spend it on yourself!

What is less known is your HSA contributions can be used on your spouse as well. This is especially true if you have self-only coverage: even if not covered by an HDHP, medical expenses spent on your spouse are considered qualified. The benefit is your spouse can consume medical care on a pre-tax bases. One partner can save funds in their HSA, and still allow the other to use those dollars.

In fact, the plan owner need not be present during the spouse’s medical spending, nor does it have to be spent with your specific HSA funds or debit card. Like all qualified medical expenses, he/she can spend with regular cash or credit card, and later reimburse themselves with pre-tax HSA dollars. Of course, in this scenario you will want to save receipts in something like TrackHSA.com to justify the expense / reimbursement, but it just shows the flexibility that Health Savings Accounts offer spouses.

Children and other dependents

In addition to your spouse, you can spend your HSA dollars on your family. This generally includes your children or any other dependents you can claim on your tax return. The IRS defines dependents as a qualifying child or relative, based on the IRS guidelines. So this could include a family member relation for whom you care. This is a great incentive for people with kids as it allows many of their medical expenses to be purchased with pre-tax dollars, which saves money. Medical expenses for your dependents count as qualified medical expense, so go ahead and use your HSA for those purchases.

People you could have claimed as dependents

The IRS includes wording that includes an additional category of people who could have been your dependents, but were not for varying reasons. The goal of this third group is to increase the people for whom spending counts as your qualified medical expenses. The IRS defines this group as:

Any person you could have claimed as a dependent on your return except that:

  • The person filed a joint return,
  • The person had gross income of $4,050 or more, or
  • You, or your spouse if filing jointly, could be claimed as a dependent on someone else’s
    return.

So these are not true dependents but are “candidates” for dependents but were not for various reasons. For example, if your children have a gross income above a certain threshold, they may not be considered a dependent, but the IRS allows their expenses to be qualified medical expenses for your HSA. In a similar vein, if you or your spouse can be claimed as dependents on someone else’s tax return (e.g. younger couples), the IRS waives this and allows the qualified medical expenses to occur.

HSA spending for children of divorced parents

IRS publication 969 provide specific language on how qualified medical expenses for children of divorced parents is handled:

For this purpose, a child of parents that are divorced, separated, or living apart for the last 6 months of the calendar year is treated as the dependent of both parents whether or not the custodial parent releases the claim to the child’s exemption.

Basically, they again increase the universe of people that constitute a qualified medical expense. They do this by saying, “if the parents were separated for the last year’s last 6 months, the child counts as a dependent for both for HSA’s”. In other words, either parent can use their HSA dollars for their children even if they are divorced/separated and dependent status is up in the air. The other parent’s actions regarding dependent and taxation do not affect how the other parent treats the child for qualified medical expenses on their Health Savings Account. This is a good ruling by the IRS as it allows more benefits to divorced families / children when it comes to their medical care.

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Note: if you need to keep track of HSA purchases for yourself, your spouse, or your children, please consider my service TrackHSA.com for your Health Savings Account record keeping. You can store purchases, upload receipts, and record reimbursements securely online.

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