HSAs Can Be Beneficial But Beware of Common Mistakes

A Health Savings Account (HSA) allows federal employees and retirees to contribute and to pay out-of-pocket medical and dental expenses in a tax-advantaged way. In order to contribute to an HSA, a federal employee/retiree must be enrolled in a high deductible health plan (HDHP). Each year the IRS defines the minimum deductible. For 2025, the minimum deductible for self only coverage is $1,650 and $3,300 for self plus one and for self and family coverages.

For the 2025 plan year, the Federal Employees Health Benefits (FEHB) program offers several HDHPs . Federal employees and retirees who are enrolled in a FEHB program-sponsored HDHP have access to an HSA. They cannot be covered by any other health insurance plan including Medicare, TriCare or supplemental health insurance. In addition, employees cannot be enrolled in a health care flexible spending account (HCFSA) offered through FSAFEDS except for a “limited expense” HCFSA (LEXFSA) that pays or reimburses only out-of-pocket dental and vision expenses.  

There are several benefits associated with HSA ownership. This column will discuss these benefits and will also explain the common mistakes that HSA owners are advised to avoid.

How FEHB Program HDHPs Coordinate with HSAs

Like other types of health plans including preferred provider organizations (PPO) and fee-for-service (FFS) plans, an employee or retiree must meet the deductible before the HDHP pays benefits. Before meeting the deductible, the HDHP participant pays the full allowed charge for the medical service. After meeting the deductible, the HDHP participant pays a percentage of the medical service cost (coinsurance), which ranges from between 5 to 20 percent depending on the HDHP.

Nevertheless, an HDHP provides “first dollar coverage” before the deductible is met for preventive care services for the HDHP owner and family members. Preventive care services include but are not limited to: (1) Periodic health evaluations; (2) Routine prenatal and well-children visits; (3) Child and adult immunizations; (4) Tobacco cessation programs; (5) Obesity weight loss programs; and (6) Screening services.

To help pay out-of-pocket costs using tax-free withdrawals from the HSA, a portion of the FEHB program HDHP monthly premiums is automatically contributed to the HSA. This is called the “premium pass-through.” The HDHP “premium pass-through” varies by plan, and ranges from $750 to $1,200 for self only coverage and between $1,500 to $2,400 for self plus one and self and family HDHP participants. In addition, the HSA owner can make voluntary tax-deductible contributions as an “adjustment to income” IRS Form 1040 deduction. There is an annual limit on HSA contributions that includes the HDHP “premium pass-through” contributions and HSA owner voluntary contributions. The 2025 HSA contribution limits are $4,300 for self only coverage and $8,550 for self plus one and self and family coverage. HSA owners aged 55 and older are permitted to contribute an extra $1,000 each year t. 

FEHB program HDHPs have maximum annual out-of-pocket limits. For 2025, these limits are $8,350 for self only coverage and $16,600 for self plus one and self and family coverage.

HSAs Offer a “Trifecta” Tax Advantage

HSA participation results in a “trifecta” (triple) tax advantage:

1. Employee premium contributions that are a part of the “premium pass-through” are made via payroll deduction and deducted from the employee’s gross salary (before federal and state income taxes are deducted), thereby lowering taxable salary and taxable income. Voluntary contributions to an HSA are deductible as an adjustment to income, also lowering federally taxable income.
2. Funds in an HSA accrue earnings – interest, capital gains and dividends,  and these accrued earnings are tax-free when withdrawn to pay qualified healthcare expenses.
3. Withdrawals are tax-free when used to pay or reimburse qualified health care expenses.

HSAs Can Be Considered as a Flexible Retirement Account

Another advantage of HSA ownership is that there are no “use-or-lose” spending restrictions from year-to-year. A federal employee or retiree who owns an HSA is not required to use up the funds in the HSA from year to year. Any unused HSA funds including contributions and earnings carry over from year to year. If a federal employee owns an HSA and leaves federal service, then the departed employee keeps the HSA to be used to pay future qualified healthcare expenses.

Federal employees who own HSAs should keep in mind that their HSAs can be used in retirement to pay or be reimbursed for qualified healthcare expenses. While a federal retiree can no longer contribute to their HSA once they enroll in Medicare, the retiree can make tax-free withdrawals from their HSA in order to pay qualified healthcare expenses throughout retirement including: (1) Reimbursement for Medicare Part B and Medicare Part D monthly premiums; and (2) Long term care insurance premiums.. Additionally, once the HSA owner becomes age 65, non-qualified withdrawals from the HSA can be made for any reason. While federal and state income taxes have to be paid on these non-qualified withdrawals, there is no 20 percent penalty. In that sense, an HSA can be considered as a flexible retirement account that is used to pay for healthcare expense income tax-free.