Insurance Premiums: HSA Eligibility

What are insurance premiums?

Insurance premiums are the amounts paid to an insurance company to cover the cost of one's health insurance plan. These amounts can be paid out monthly, quarterly or annually, and their value is heavily contingent on factors including the type of coverage, the likelihood of a claim being made, where the policyholder lives or operates a business, the policyholder's inherent risk of health problems or behavior and competitive pricing with other insurance companies.

In addition to being a source of revenue, premiums are an insurance company's means of covering the many liabilities that come with the plans that they underwrite, as well as investing these amounts for larger returns. However, state insurance regulators work to make sure that companies will have adequate reserves to cover any claims that policyholders may file to ensure that their medical expenses are covered. Last but not least, premiums may fluctuate and increase/decrease after each policy period, which is based on numerous factors, including claims made in the past plan year or cost of coverage increases/reductions (Investopedia).

How are insurance premiums reimbursed?

For a policyholder to continue to receive coverage through his/her insurance plan, premiums must be paid according to the policy's payment plan schedule, but it is left up the policyholder to decide where these funds should come from. For instance, a flexible spending account (FSA) is only designed to cover medical products and services for an account holder, his/her spouse and dependents. As regulation IRS '213(d) states regarding the FSA account spending: "medical care includes amounts paid for the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body." Insurance premiums fall outside of this definition and pay for coverage, not direct care.

Conversely, business-sponsored accounts like health reimbursement arrangements (HRAs) may be underwritten to cover insurance premiums, but this is left up to the employer to decide and varies greatly. However, HSA holders can pay for health insurance premiums for his/her spouse and qualified dependents if the account holder is receiving healthcare continuation through COBRA or is receiving unemployment compensation through a federal or state program. 

The IRS says that the following are eligible under an HSA:

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

1.          Long-term care insurance.

2.          Health care continuation coverage (such as coverage under COBRA).

3.          Health care coverage while receiving unemployment compensation under federal or state law.

4.          Medicare and other health care coverage if you were 65 or older (other than premiums for a Medicare supplemental policy, such as Medigap).”