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Flex-Ed: Why aren't insurance premiums covered by an FSA?

Basics

More than 35 million Americans take advantage of flexible spending accounts (FSAs). They can set aside pre-tax money from paychecks to spend on out-of-pocket health expenses (copays, deductibles, over-the-counter items, etc.). Employees can save up to 40% of each dollar put into an FSA, as long as its spent on qualified health costs. However, if you decide to use your FSA card to cover the cost of insurance premiums, you may be surprised to find that an FSA will not cover them.

Why do insurance premiums differ from other insurance expenses?

Health insurance premiums are 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.Their value is heavily contingent on factors.Factors could include 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.

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 policy holders may file to ensure that their medical expenses are covered. Premiums may fluctuate and increase/decrease after each policy period. This is based on numerous factors, including claims made in the past plan year, or cost of coverage increases/reductions.

For a policy holder to continue to receive coverage through an insurance plan, premiums must be paid according to the policy's payment plan schedule. It's left up the policy holder 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, spouses and dependents.

As regulation IRS '213(d) states regarding the FSA 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." Put simply - health insurance premiums fall outside of this definition and pay for coverage, not direct care.

Are health insurance premiums ever covered by consumer-directed health care accounts?

FSA holders cannot count insurance premiums as FSA-eligible.Health reimbursement arrangement (HRA) and health savings account (HSA) holders have more options. Business-sponsored accounts HRAs may be underwritten to cover health insurance premiums, but that's left up to the employer.

HSA holders can pay for health insurance premiums for spouses and qualified dependents. They can do so if the account holder is receiving health care continuation through COBRA or unemployment compensation through a federal or state program.

If you have an FSA, don't fret! Your FSA covers thousands of FSA eligible items, as well as other vital out-of-pocket expenses like co-payments, deductibles, over-the-counter items,and much more. For questions about product eligibility, check out our Eligibility List. And then once you have some spending ideas, budget yourself with our FSA Calculator.

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New to FSAs? Need a refresher course in all things flex spending? Our weekly Flex-Ed column gives you a weekly dose of FSA Living 101, offering tips for making the most of your tax-free funds. Look for it every Thursday, exclusively on the FSAstore.com Learning Center. And for the latest info about your health and financial wellness, be sure to follow us on Facebook, Instagram and Twitter.

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