Since early February 2025, thousands of federal employees have received notices from their agencies about losing their federal jobs. Many of these employees are not eligible for any type of retirement including early retirement (VERA or VSIP), a discontinued service retirement (DSR) or an immediate (unreduced) retirement. These employees will be leaving federal service and with that departure, comes the permanent loss of some federal benefits including the health insurance offered through the Federal Employees Health Benefits (FEHB) health insurance program. Many employees are also enrolled in a health care flexible spending account (HCFSA) or a “limited expense” health care flexible spending account (LEXHCFSA) offered through the FSAFEDS program (https://www.fsafeds.com). Some employees are enrolled in an FEHB program high-deductible health plan (HDHP) associated with a health savings account (HSA). This column discusses what federal employees who are leaving federal services need to do with respect to the HCFSA/LEXHCFSA and HSA before they leave federal service.
HCFSA/LEXHCFSA
Federal employees who are enrolled in an HCFSA or a LEXHCFSA through FSAFEDS during 2025 and who will be leaving or retiring from federal service sometime during 2025 are advised to use up all of their HCFSA/LLEXHCFSA allocated funds before the day they officially leave or retire from federal service. The amount of their allocated funds is the amount they chose to have deducted from their gross salary during calendar year 2025. That amount ranges from the minimum of $100 to the maximum $3,300. The amount that employees decided to have deducted from the gross salaries during 2025 and allocated to their HCFSA/LEXHCFSA accounts during 2025 was made during the FSAFEDS “open season” held between November 11,2024 and December 9, 2024. Employees who enrolled in FSAFEDS for 2025 were also allowed to roll over up to $640 of unused HCFSA/LEXHCFSA funds from the 2024 plan year.
As mentioned, both an HCFSA and an LEXHCFSA are funded from an employee’s gross salary, with employee contributions to their HCFSA/LEXHCFSA deducted and spread evenly over 26 pay dates, starting with the first pay date in early January 2025 and ending with the last pay date in late December 2025. The following example illustrates:
Example 1. Deena enrolled in an HCFSA during the 2024 FSAFEDS “open season”. She elected to set aside the maximum $3,300 for her HCFSA during 2025. Starting with Deena’s first pay date in January 2025, $3,300/26, or $126.92 is being deducted from Deena’s bi-weekly gross salary (before all taxes – federal and state income taxes, and Social Security and Medicare Part A payroll taxes). Whenever Deena, or a member of her family, incurs a medical, dental or vision expense, Deena can request funds from her HCFSA to either reimburse Deena for the amount she paid or to pay the medical provider directly. Deena can also ask for an advancement of her HCFSA funds to pay a health care provider even though the medical procedure has not yet been performed.
However, each year HCFSA and LEXHCFSA participants have a deadline to “use or lose” their allocated HCFSA/LEXHCFSA funds. There is a limited amount they can roll over to the next plan year; for example, it was $640 from the 2024 plan year to the 2025 plan year. The deadline to “use or lose” is the earlier of: (1) December 31, 2025; or (2) The day an employee retires or leaves federal service. Any funds remaining in a departing employee’s HCFSA or LEXHCFSA account, as of the employee’s departure or retirement date, will be forfeited.
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This means that those employees with an HCFSA/LEXHCFSA account and who will be leaving or retiring from federal service during 2025 need to use up their allocated funds no later than their departure or retirement date. They, and their dependent family members, should schedule medical appointments, dental check-ups, and eye exams. This is especially important if they are going to lose their FEHB program health insurance after leaving federal service. Continuing with the example above:
Deena has been notified by her agency that her job is being abolished as of June 1, 2025. Deena intends to leave federal service on May 31, 2025. As of April 19, 2025, Deena has $900 of unused HCSFA funds. With three pay dates remaining until she resigns on May 31, 2025, there is a total of $900 plus $380.76 (three times $126.92) or $1,280.76 of qualified expenses that Deena and her family should incur in order for Deena not to lose any of her HCFSA funds.
HSA
A health savings account (HSA) is similar to an HCFSA/LEXHCFSA. Contributions to an HSA and an HCFSA/LEXHCFSA are made with before-taxed dollars. All withdrawals from an HSA and an HCFSA/LEXHCFSA that are used to reimburse or to pay qualified medical expenses are income tax-free.
But the HSA and HCFSA/LEXHCFSA are different in several ways. The first difference that unlike an HCFSA in which an employee can be enrolled in any type of health insurance plan (fee-for-service, preferred provider organization, health maintenance organization, consumer driven health plan, high-deductible health plan), an employee must be enrolled in a high-deductible health plan associated with an HSA in order to contribute to the HSA. Second, unlike the HCFSA/LEXHCFSA in which an employee can carry over from one plan year to the next plan a limited amount of unused funds and an employee who leaves federal service or retires from service loses his or her HCFSA/LEXHCFSA, an employee who owns an HSA can carry over from one plan year to the next plan year any amount of unused HSA funds. A federal employee who leaves or retires from federal service keeps the HSA. This means that a departed federal employee or retired federal employee can withdraw HSA funds to pay qualified medical expenses for himself or herself and members of his or her family.
Unlike federal employees who have an HSA/LEXHCFSA, those federal employees who own an HSA and who are leaving or retiring from federal service during 2025 need not be concerned about losing their HSA funds. The only thing a federal employee cannot do with respect to their HSA once they leave federal service is to contribute to the HSA. To do so, the departed federal employee would have to enroll in a high-deductible health plan that is part of a group health insurance sponsored by an employer. If an employee retires from federal service and meets the requirements to remain enrolled in the FEHB program during retirement and remains enrolled in a high-deductible health plan, then the retiree can keep contributing to their HSA. However, once enrolled in Medicare, they can no longer contribute to their HSA.
Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street - Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
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Ed Zurndorfer, EA, ATA, CFP®, CLU®, ChFC®, CEBS®, ChFEBC℠: Federal Employee Benefits Expert
A former career Federal employee, Ed has published a staggering 1,200+ separate articles on Federal Benefits and Retirement!
Just “Google” his name, and you are likely to find a plethora of sites that contain his writings. Drawn to its mission to reach, teach
and serve Feds, Serving Those Who Serve is the only financial planning practice with which Ed has chosen to affiliate in over
20 years teaching. In addition to conducting Federal Benefits seminars for Serving Those Who Serve, you can find Ed’s
writings here on our blog in the FedZone, and on Fed-Soup, MyFederalRetirement, FederalNews Radio and NITP.
He is a member of the Maryland Society of Accountants, the National Association of Enrolled Agents, the International Society of Certified Employee Benefits Specialists, the Financial Planning Association, the National Association of Health Underwriters,
and the Society of Financial Service Professionals. Since 1999, Ed has taught many thousands of Federal employees about
their benefits, in person and at Federal agencies all over the country. Ed is a true national treasure.
Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street - Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.