Can I Keep My Health Savings Account When I’m On COBRA?

Can I still use my HSA account when I’m on COBRA insurance?

If you’re enrolled in a High Deductible Health Plan (HDHP) and have an HSA, you can continue to use your HSA funds for qualified medical expenses even if you elect COBRA continuation coverage for your HDHP. Your HSA is an individual account, and its funds remain available to you regardless of changes in your employment or health coverage status.

If you elect COBRA to continue your HDHP, you remain eligible to contribute to your HSA. However, if you switch to a plan that is not an HDHP through COBRA or any other means, you can no longer make new contributions to your HSA, although you can still use the existing funds in your account for qualified expenses.

About HSAs

Health Savings Accounts (HSAs) are tax-advantaged accounts designed to help individuals save for and pay for qualified medical expenses. HSAs are available to those enrolled in a High Deductible Health Plan (HDHP). Contributions to an HSA are made with pre-tax dollars, which can lower your taxable income. The funds in an HSA roll over year to year if they are not spent, allowing the account to grow over time. Withdrawals from an HSA for qualified medical expenses are tax-free. An HSA also offers the flexibility to invest funds, potentially increasing savings for future medical expenses. However, using HSA funds for non-medical expenses before the age of 65 results in taxes and penalties on the withdrawal.

Can I still use my FSA account when I’m on COBRA insurance?

You can continue your Flexible Spending Account (FSA) when you go on COBRA, but only for the remainder of the plan year in which you enroll in COBRA. Unlike COBRA continuation that can be extended for up to 18 months (or longer in certain cases), the FSA continuation under COBRA is limited to the end of the current plan year, and you must have a positive balance in your FSA to be eligible.

You’ll be responsible for paying the full amount of your FSA contributions on an after-tax basis, plus a possible administrative fee. Once the plan year ends, you cannot renew the FSA for the next year under COBRA.

About FSAs

Flexible Spending Accounts (FSAs) are tax-advantaged accounts that allow employees to save money for eligible medical expenses. The funds contributed to an FSA are deducted from an employee’s salary before taxes, reducing their taxable income. Employees can use these funds for qualified medical expenses, such as prescriptions, doctor’s visits, and medical equipment. There are two main types: Health FSAs for medical expenses and Dependent Care FSAs for childcare or eldercare expenses. Contributions are subject to annual limits and generally must be used within the plan year, with some plans offering a grace period or allowing a small amount to be carried over into the next year.