Ask Matt & Joel: Can I use HSA funds to pay for healthcare premiums?

Today’s question comes from Gabe in Cincinnati, OH!…

“Hey guys, I have a question about our favorite investing vehicle, the HSA.

My wife was talking to a co-worker the other day who is retiring early, and they said they were going to use their HSA funds to cover the cost of their insurance premium till they were able to sign up for Medicare.

My question is, can you use your HSA to cover insurance premiums in this case or any other case? It almost sounds too good to be true.

I couldn’t find anything that could clearly answer my question online. Does it differ state by state or are there any other factors? Thanks in advance for your advice.”

The short answer:

When things sound too good to be true, they usually are. And that’s the case here, Gabe.

No, you can’t just pay regular health insurance premiums with HSA funds.

But there are a couple scenarios where a person could use those funds to offset premiums down the road for Medicare, or cover COBRA premiums in the case of job loss.

Let’s talk through the ins and outs of what you can use HSA funds for…

Using HSA funds for COBRA

In the case you lose your job, you can use HSA funds to pay for COBRA coverage.

COBRA is a temporary health insurance solution that lets individuals keep the same health insurance plan they had when employed. It lasts a max of 18 months from when you lose your job.

But because COBRA can be incredibly expensive, you might not want to go that route. A cheaper solution for those laid off is probably paying out of pocket for a less expensive plan on the open healthcare exchange.

It’s nice to know you can use your HSA in the case of an emergency to cover COBRA. But it’s not advised – we want those HSA funds to continue growing as much as possible!

Using HSA for Medicare

Later in life, when Medicare kicks in, you can use HSA funds to pay for certain Medicare premiums. Not the supplemental health policies, but part A, B, & D coverage qualify.

You can also use HSA funds to pay for Long Term Care insurance premiums. Technically those insurance premiums are considered a medical expense. So they are covered! 

Healthcare in early retirement

Sorry to burst your wife’s co-workers’ bubble! Her early retirement plans might be based on incorrect assumptions 😬

But don’t worry – early retirees have a few different options for healthcare coverage.

First, they might have a working spouse that still has an active employer healthcare plan. Even if it costs a little money to join that plan, it could be a good route to take.

We mentioned this earlier, but anyone can go grab an insurance policy on the Healthcare Marketplace which can carry them through until Medicare kicks in.

The best part is, premiums are largely based on household income. Which in the case of folks who aren’t working anymore, might not be much at all!

HSA shoeboxing

I love that you called HSA’s our favorite retirement account. You’re right!

We love them because of the triple tax advantage. There’s no tax on money going in, no tax on the investment growth, and no tax on withdrawals  either (if used for eligible med expenses).

For those that don’t know, the secret sauce behind an HSA is “shoeboxing” eligible medical expenses and processing claims later in life.

Instead of withdrawing and using HSA funds now, the longer you wait, the more your investments have a chance to grow tax free inside that account.

Here’s a full description of how to make the most of your HSA account. It takes a bit more effort and planning to make that HSA work properly for your future. But if you jump through the hoops and keep proper records, it’s the tops!

The Bottom Line:

You can’t just withdraw HSA funds and use them to pay for regular health insurance premiums. But you can use them to pay for COBRA coverage, certain Medicare premiums, as well as long term care insurance if you have it.

Using your HSA as a retirement account (instead of just a healthcare piggyback each year) is a powerful way to grow tax-free wealth for the future. But it’s super important to understand the ins and outs of HSA rules!

For the full version of this discussion, check out Podcast Episode #790 (it’s the 4th question in the episode)

Related posts:

• Should I pay medical bills with a credit card or my HSA debit card?
• How to save for retirement if you don’t have a 401k
• All the pros and cons of the FIRE movement