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Retire at 62 - use HSA for health insurance premiums


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If I understand the current rules correctly, if I retire at age 62, I can use my HSA funds to pay COBRA health insurance premiums, but after that (18 months) I cannot without paying taxes on the withdrawal.  Seems like a rule that wasn't very well thought out.  Is this correct?  Anyone else think this is unfair?

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Here's an overview of that HSA premium rule:

https://www.theabdteam.com/blog/hsa-distributions-for-premium-expenses/

Most Premium Expenses are Not HSA Qualified Medical Expenses

Although in almost all circumstances the Publication 502 list of §213(d) medical expenses mirrors those expenses eligible for tax-free HSA distributions, there are a few differences.  The slight modifications to the list of reimbursable expenses for account-based plans are set forth in IRS Publication 969.

The most significant discrepancy is the general exclusion of premium expenses from the list of HSA qualified medical expenses eligible for tax-free reimbursement.  Except in the four limited situations described below, use of an HSA to pay for premium expenses would be a non-medical distribution subject to income taxes and (if under age 65) a 20% additional tax.

Exception #1: Long-Term Care Insurance Premiums

Individuals can take tax-free HSA distributions to pay for long-term care policy premiums, but only up to a limit that is based on age that adjusts annually.

The annual cap on tax-free HSA distributions for long-term care insurance premiums is as follows in 2020:

Age 40 or under: $430

Age 41 to 50: $810

Age 51 to 60: $1,630

Age 61 to 70: $4,350

Age 71 and over: $5,430

Exception #2: COBRA Premiums

Individuals can take tax-free HSA distributions for COBRA premiums or any other continuation coverage premiums required by federal law (e.g., USERRA).

Exception #3: Any Health Plan Premium While Individual is Receiving Federal or State Unemployment

Individuals who are receiving unemployment under federal or state law can take tax-free HSA distributions to pay for any health plan premium, including individual coverage purchased on the exchange.

Exception #4: Medicare Premiums

Individuals who have reached age 65 can take tax-free HSA distributions for Medicare, an employer-sponsored retiree plan, or any other health coverage.

Important limitation: Medicare supplemental policy premiums (such as Medigap) do not qualify for tax-free HSA distributions.

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You can still always use the HSA to pay for qualifying medical expenses on a tax-free basis even when you retire and no longer are covered by an HDHP (or otherwise lose HSA eligibility).  HSA eligibility is only addressing the ability to contribute to the HSA.  You're just pointing out the restriction on the use of the HSA for premiums.

Here's an overview:

https://www.theabdteam.com/blog/the-hsa-shoebox-rule/

Loss of HSA Eligibility Does Not Affect Ability to Take Tax-Free Medical Distributions

Individuals do not have to maintain HSA eligibility (i.e., the ability to make or receive HSA contributions) to take tax-free distributions for medical expenses.

This means an HSA owner can:

  1. Build up an HSA balance, move to non-HDHP coverage in a subsequent year, and still use that HSA (after losing HSA eligibility) to cover qualifying medical expenses tax-free; and/or
  2. Incur but not reimburse qualifying expenses while HSA-eligible, move to non-HDHP coverage in a subsequent year, and still use that HSA (by preserving the shoebox of health receipts) to reimburse those expenses incurred while HSA-eligible.

HSA eligibility is relevant only for determining the ability to make or receive HSA contributions—not for purposes of taking tax-free medical distributions.

Example 2:

  • Same as Example 1, but Phil moves to non-HDHP coverage and loses HSA eligibility as of 2022.

Result 2:

  • In 2022 or any future year after losing HSA eligibility, Phil can still continue to incur medical expenses and take tax-free medical distributions from his HSA to pay for such expenses.
  • In 2022 or any future year after losing HSA eligibility, Phil can still reimburse himself for the $2,000 in 2021 health expenses incurred (with the records saved in his shoebox).
  • The only consequence of Phil’s loss of HSA eligibility is that he cannot make or receive HSA contributions in 2022 or any future year unless he regains HSA eligibility.
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Thanks for the input. 
 

On 8/17/2021 at 3:52 PM, Brian Gilmore said:

The most significant discrepancy is the general exclusion of premium expenses from the list of HSA qualified medical expenses eligible for tax-free reimbursement.  Except in the four limited situations described below, use of an HSA to pay for premium expenses would be a non-medical distribution subject to income taxes and (if under age 65) a 20% additional tax.

So it sounds like this could be just what I thought......not well thought out! 

I did not know that an extra 20% would apply!  Even worse than I thought!

I would rather not use my after-tax dollars when I retire to bridge the gap, especially since I have so much available in the HSA.  I've saved religiously since 2007 so that I could retire early at age 62 if I wanted to.  The last thing I want to do is pay ANY tax on my HSA dollars.

I was hoping I could post something here in case anyone who specializes in this area could bring about change in the rules.  It seems everybody else gets to pay health insurance premiums with pre-tax dollars except seniors!  And the rule about not using it to pay Medicare supplement premiums is unfair too!

 

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