Healthcare costs can sometimes throw a wrench in even the best-laid retirement plans. They are unpredictable, often expensive, and can derail financial stability in retirement if not accounted for. Many federal employees focus on building their Thrift Savings Plan (TSP) or pensions, while healthcare planning takes a backseat — until it becomes a critical issue.
Luckily, Feds have access to unique tools, like Health Savings Account (HSA)-eligible Federal Employees Health Benefits (FEHB) plans, which combine tax savings, contribution flexibility, and investment potential to help manage rising healthcare costs in retirement. These plans pair Health Savings Accounts (HSAs) for federal employees with high-deductible health plans (HDHPs), offering federal employees a way to save pre-tax dollars for both current and future medical needs.
Pairing HSA-Eligible FEHB Plans with HSAs
HDHPs offered under the Federal Employees Health Benefits (FEHB) program provide lower monthly premiums in exchange for higher deductibles, encouraging federal employees to take a strategic approach to healthcare spending. To qualify as an HSA-eligible FEHB plan, it must meet the following 2025 IRS requirements:
- Minimum deductible: $1,650 for self-only coverage, $3,300 for family coverage.
- Maximum out-of-pocket costs: $8,300 for self-only, $16,600 for family coverage.
HDHPs can pair with Health Savings Accounts (HSAs). These accounts are designed to help you save pre-tax dollars for qualified medical expenses, such as prescriptions, doctor visits, and hospital stays. HSAs also provide a long-term investment opportunity for healthcare costs during retirement, since they offer unlimited carryover of balances from year to year, unlike Health Care Flexible Spending Accounts (HCFSAs).
For 2025 HSA contribution limits, the IRS allows up to $4,300 for individuals and $8,550 for families, with an additional $1,000 catch-up contribution for those aged 55 and older. Many FEHB HDHPs also include a “premium pass-through,” where insurers contribute directly to your HSA, providing an immediate boost to your savings.
Tax Advantages of HSAs
HSAs offer significant advantages, thanks to their triple tax benefits:
- Tax-free contributions: Reduce your taxable income with pre-tax deductions through payroll.
- Tax-free growth: Investment earnings, such as interest or market gains, grow tax-free within your account.
- Tax-free withdrawals: Pay for qualified medical expenses without incurring federal taxes.
However, it’s important to note that state tax treatment of HSAs varies. While federal tax advantages apply universally, certain states tax contributions or earnings. Federal employees should confirm how their state treats HSA funds to avoid surprises. This is especially significant for retirees who plan to relocate post-retirement.
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Enrollment and Key Considerations
To enroll in an HSA-eligible High Deductible Health Plan (HDHP), federal employees must select a qualifying plan during the Federal Employees Health Benefits (FEHB) Open Season or after a qualifying life event. It’s critical to ensure you meet the IRS requirements, such as not having additional health coverage like Medicare, as these can impact HSA eligibility.
Popular options like Aetna Direct HDHP and GEHA HDHP are frequently chosen by Feds for their competitive premium pass-through contributions and low administrative costs.
Unlike Flexible Spending Accounts (FSAs), which have a “use-it-or-lose-it” policy, HSAs allow unused funds to roll over annually. This feature, combined with tax advantages and investment opportunities, makes them an attractive option for federal employees aiming to build a reserve for current and future healthcare expenses.
However, HSAs are not ideal for estate planning. If an HSA is passed to a non-spouse beneficiary, the funds become taxable as ordinary income. For this reason, federal employees may benefit from spending down HSA funds during retirement, using them for qualified medical expenses when possible.
Plan Ahead for Your Healthcare Costs in Retirement
With the right plan in place, you can retire with greater financial confidence, even if you’re faced with unexpected healthcare costs. For personalized advice regarding optimizing your HSA strategy or choosing the right plan for your needs, reach out to the team at Serving Those Who Serve at [email protected].
The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Serving Those Who Serve writers and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy suggested. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment or financial decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. 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. **
