Resource Aid Center

8 min read · Last updated September 14, 2026

A health savings account balance can pay COBRA continuation premiums completely tax-free, one of a short list of insurance costs the Internal Revenue Service (IRS) actually permits an HSA to cover. Unlike a flexible spending account, the balance belongs to the employee permanently, survives a layoff intact, and can be spent on COBRA premiums even in a month with no paycheck and no new HSA contribution at all.

In this article

• What the first 24 hours require
• What an HSA can actually pay for after a layoff
• The last-month rule, and its trap
• The mistakes that cost people their tax-free status
• What to do at 30, 60, and 90 days
• Frequently asked questions

Devon had $6,100 sitting in an account nobody mentioned at his layoff meeting. Two weeks in, his severance was already earmarked for rent and groceries, and a letter about his old 401(k) loan warned the unpaid balance would become taxable income if he did not roll it over by the tax filing deadline. That $6,100 was in his health savings account, an account he had been quietly funding through payroll deduction for four years and had nearly forgotten existed.

That balance was still his. It did not vanish with his badge, and it could legally pay his COBRA premium, the cost of continuing his old employer’s health plan on his own dime, without a cent of it counting as taxable income.

What the first 24 hours require

Log into the HSA directly, separately from any employer benefits portal that may lose access after termination, and confirm the current balance and the debit card or checkbook still work. Some HSA administrators pause card access briefly after an employer stops submitting payroll files; if that happens, ask specifically for a reimbursement or distribution process rather than assuming the money is inaccessible.

Also confirm whether COBRA continuation of the old employer plan is the coverage you are electing, since the account can pay that premium directly, or whether you are shopping the Affordable Care Act (ACA) marketplace instead, since the two options run on different election deadlines that matter regardless of which one the HSA ends up paying for.

What an HSA can actually pay for after a layoff

Most insurance premiums are specifically excluded from what an HSA can pay tax-free. According to IRS Publication 969, the agency’s own guidance on health savings accounts, an HSA generally may not be used to pay for insurance, with four exceptions: long-term care insurance, health care continuation coverage such as COBRA, health coverage purchased while receiving unemployment compensation, and Medicare or other coverage for someone 65 or older, other than a Medicare supplemental policy. COBRA premiums sit on that short list by name.

That distinction matters because the average COBRA premium is not small. Based on the most recent Employer Health Benefits Survey from KFF, a nonpartisan health policy research organization formerly known as the Kaiser Family Foundation, the average total annual premium for employer-sponsored family coverage reached $26,993 in 2025, or roughly $2,249 a month before any COBRA administrative fee. Under COBRA, the person who elects continuation coverage generally pays the full premium themselves, plus up to a 2% administrative charge, since the employer is no longer subsidizing any part of it. On a family plan near that average, that is close to $2,294 a month coming out of pocket, and every dollar of it can come from the HSA tax-free rather than from a savings account already stretched by severance running out.

Insurance HSA funds can pay tax-free	Insurance HSA funds generally cannot pay
COBRA continuation coverage premiums	An individual ACA marketplace plan premium (not purchased while on unemployment)
Coverage purchased while receiving unemployment compensation	A standard employer group premium while still actively employed
Long-term care insurance (subject to age-based limits)	Medicare supplemental (Medigap) premiums
Medicare and other coverage, only once age 65 or older	Life or disability insurance premiums

The last-month rule, and its trap

Separate from spending an existing balance, a layoff can also affect how much someone is still allowed to contribute to an HSA for the year. Contribution eligibility requires having a qualifying high-deductible health plan (HDHP); once someone loses that coverage and has not replaced it with another HDHP, such as one bought on COBRA or the marketplace, new contributions generally stop.

One federal provision softens that for someone who regains HDHP coverage late in the year. Under what the IRS calls the last-month rule, someone who is HSA-eligible on December 1 is treated as eligible for the entire year, allowing the full annual contribution, currently $4,400 for self-only coverage or $8,750 for family coverage in 2026, plus an additional $1,000 for anyone 55 or older. The trade-off is a testing period: that person has to remain HSA-eligible through December 31 of the following year, or the extra contribution the rule allowed becomes taxable income in the year eligibility lapsed, plus a 10% additional tax on top of it.

The mistakes that cost people their tax-free status

The most common mistake is assuming the HSA closed along with the employer’s benefits when the job ended. It did not. Former employees sometimes let a small monthly maintenance fee quietly drain a forgotten balance for years because nobody realized the account was still theirs to manage and spend directly.

The second mistake is using HSA funds for a spouse’s or ex-spouse’s COBRA premium without checking whose name the coverage is under. The IRS generally allows HSA funds to pay for the account holder’s spouse and tax dependents, but the coverage still needs to be a type the rules actually permit, such as COBRA continuation, not a category the rules exclude.

The third is triggering the last-month rule’s full contribution, then taking a job with no HDHP option before the 13-month testing period ends. That single decision can turn a legitimate tax-advantaged contribution into taxable income plus a penalty, entirely avoidable by checking the new employer’s plan type before making the decision, not after.

What to do at 30, 60, and 90 days

Within the first 30 days, confirm the exact HSA balance, verify card or check access, and use the account to cover the COBRA premium bill directly if that is the coverage you elected. If your 401(k) loan offset from the layoff itself is competing for the same limited cash, remember the HSA is a separate pool of money the offset deadline does not touch at all.

At 60 days, if you have not yet elected COBRA versus a marketplace plan, that decision window is closing, and whichever you choose changes what the HSA is allowed to pay for going forward, since only COBRA and unemployment-linked marketplace coverage qualify, not a standard subsidized marketplace plan.

At 90 days, if you have returned to work with a new HDHP, check whether resuming contributions makes sense given your current balance and expected medical costs, or if rebuilding the basics from the first 72 hours after a layoff is still the more urgent priority. The HSA balance will still be there either way. It does not expire.

Frequently asked questions

Does my HSA balance disappear if I don’t use it by the end of the year? No. Unlike a flexible spending account, an HSA has no use-it-or-lose-it deadline. The balance carries forward indefinitely and remains the account holder’s money even across multiple job changes.

Can I use my HSA to pay for an ACA marketplace plan after a layoff? Generally no, with one exception. HSA funds can pay tax-free for marketplace-style coverage specifically purchased while receiving unemployment compensation. A standard marketplace premium not tied to unemployment benefits is not on the IRS’s permitted list.

What happens if I contribute the full year’s amount under the last-month rule and then lose HDHP eligibility? The extra contribution the rule allowed becomes taxable income in the year you lose eligibility, and it is also subject to a 10% additional tax, unless the loss of eligibility was due to death or disability.

Can I use my HSA to pay a family member’s COBRA premium? Yes, if that family member is your spouse or a tax dependent and the coverage itself is a qualifying type, such as COBRA continuation coverage. The relationship and the coverage type both have to qualify, not just one or the other.

Does my HSA stop growing once I’m unemployed? The existing balance can still earn interest or investment returns depending on how the account is structured; only new contributions require current HDHP eligibility. An unemployed person with no HDHP can still hold and spend an existing balance tax-free on qualified expenses.