Owning an HSA

What is A Health Savings Account (HSA)? And How Can Federal Employees Can Benefit by Owning An HSA?

FEDZONE Ed Zurndorfer

Edward A. Zurndorfer

Health Savings Accounts (HSAs) have been available to federal employees and retirees since 2004. The idea behind the creation of HSAs was that health insurance policies should limit their coverage for many day-to-day medical costs. They would do this by increasing their insurance deductibles and concentrating their coverage on “major medical” (catastrophic) coverage. The downside to this arrangement is that health insurance policyholders with access to HSAs are required to pay medical costs until their health insurance becomes effective. To make this insurance arrangement palatable to potential policyholders, Congress allowed these policyholders to deposit an amount closely equivalent to the health insurance deductible in a tax-beneficial savings account called an HSA.

When the Affordable Care Act (ACA) became law in 2014, Congress had hoped for a slowdown in health insurance premiums increases and a slowdown in overall medical costs. Part of the push behind the passage of the ACA was a conscious attempt by Congress to force individuals to take responsibility for some of their medical expenses.

Type of Health Insurance Requirement

One of the requirements for an individual to contribute to an HSA is that the employee must be enrolled in a qualified high deductible health plan (HDHP). Each year the IRS defines what is considered a qualified HDHP. One requirement is that the HDHP must have a minimum annual deductible. There is also a maximum amount that the HSA owner can contribute or a before-tax basis to their HSA each year, resulting in current year tax savings when contributions to an HSA are made. The following table shows 2022 and 2023 qualified HDHP limits:

Annual Qualified HDHP Limits

Type of Heath Insurance EnrollmentSelf OnlySelf Plus One/ Self and FamilySelf OnlySelf Plus One/ Self and Family
Minimum Annual Deductible$1,400$2,800$1,500$3,000
Maximum Annual Out-of-Pocket Expense$7,050$14,100 $7,500$15,000
Maximum Contributions$3,650$7,300$3,850$7,750

During the current Federal Employees Health benefit (FEHB) program “open season”, federal employees can choose from several health plans in the FEHB program that are qualified HDHPs. Once enrolled in a qualified HDHP associated with an HSA, they can fund their HSA starting with their first pay date in January 2022. 

A qualified HDHP can allow for only in-network coverage (similar to an HMO) or allow for out-of-network coverage (similar to a PPO plan). If a qualified HDHP has in-network benefits only, then an HDHP policyholder cannot go outside of the network and expect insurance coverage once the annual deductible is met. All in-network and out-of-network benefits offered through the HDHP plan, including prescription drug coverage (if offered), will apply towards the annual deductible.

Another rule when utilizing a qualified HDHP in order to contribute to an HSA is that the HSA account owner (and spouse if family coverage) may not have any other health insurance that is not a qualified HDHP. Certain other insurance is allowed including dental, disability income, long-term care and vision insurance. Also, a federal employee in the same year cannot contribute both to a health care flexible spending account (HCFSA) (offered through the “FedFlex” program) and to an HSA. However, an employee who contributes to an HSA can contribute to a limited expense” health care flexible spending account (LEXHCFSA) that only reimburses the account owner for dental and vision expenses. For more information about the HCFSA and LEXHCFSA, employees should go to www.fsafeds.com.

An HDHP may provide preventive care benefits without the HDHP owner and family members first having to meet the plan deductible. Preventive care includes, but is not limited to, the following:

  • Periodic health evaluations
  • Routine prenatal and well-children visits
  • Child and adult immunizations
  • Tobacco cessation programs
  • Obesity weight loss programs, and
  • Screening services.

Once a federal employee has enrolled in an HDHP offered through the FEHB program, the employee and family members are encouraged to utilize network medical providers. They will receive negotiated discounts from the provider. An insurance card is given from the provider to submit a claim. The claims will be first reduced to the negotiated amount, and then the claims will be applied towards the deductible with any remainder to be paid directly by the employee or as a direct debit amount from their HSA. Note that contributions are made to the HSA with before-taxed money. The HSA accrues earnings over time and qualified withdrawals of HSA contributions and accrued earnings that are used to pay medical, dental and vision expenses are tax-free. In that sense, the HSA offers a “trifecta” tax benefit, namely:

  • (1) Tax deduction of the contributions leading to current year tax savings
  • (2) No tax due on the accrued earnings, and
  • (3) No tax due on qualified withdrawals.

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Who is Eligible to Contribute to an HSA?

An individual must meet four rules in any given month in order to contribute to an HSA. These four rules are:

  1. Be enrolled in a qualified high deductible health plan (HDHP) as of the first of such month.
  2. Not covered by any other health insurance plan unless it is also an HDHP.
  3. Not entitled to benefits under Medicare (generally has not reached age 65), and
  4. Cannot be claimed as a dependent on another individual’s tax return.

Note that although HSA contributions may no longer be made by an individual who at age 65 enrolls in Medicare, IRS Notice 2004-50 Question 2 clarifies that an HSA contribution is allowed at any age until an individual actually enrolls in Medicare. An individual who is not receiving Social Security benefits at age 65 is not required to enroll in Medicare at age 65. For example, a federal employee who continues to work in federal service past age 65 and is enrolled in an HDHP may continue to contribute to his or her HSA.


With respect to HSA contributions, both the employee and the employee’s employer may contribute to the employee’s HSA in the same year. A portion of a federal employee’s premium and the agency’s FEHB program premium contribution on behalf of the employee is automatically deposited into the employee’s HSA that is associated with an employee’s HDHP.  Note that in general a federal employee’s agency contributes on average 72- to 75 percent of the employee’s FEHB program health plan premium. For an employee enrolled in an HDHP associated with an HSA, part of the agency premium contribution is deposited into the employee’s HSA (this called the premium “pass-through”). The employee can also contribute to his or her own HSA up to the annual HSA contribution limit (including the extra $1,000 contribution if the HSA owner is at least age 65). Employee contributions to his or her HSA are deductible on Form 1040, Schedule 1, Line 13 after using Form 8889. Contribution limits for 2022 and 2023 are listed above.


When qualified medical expenses are reimbursed or paid directly from an HSA, they are not taxable even when paid from HSA earnings. The question becomes: What is considered a “qualified” medical expense? In order to be a qualified medical expense, the expense must be:

  1. Incurred after contributions have been paid to the HSA (either the employer, the employee or a combination of both)
  2. For a medical expense that would be deductible as an itemized deduction if not reimbursed or paid directly
  3. For insulin or an over-the-counter medicine for which the HSA owner, or a dependent, gets a prescription
  4. Paid for the HSA owner, a spouse, a dependent claimed on the HSA owner’s federal income tax return. Or for an individual the HSA owner could have claimed as a tax dependent but did not because the individual filed a joint tax return or were claimed by someone else. This could be a child of a divorced parent who qualifies even if the dependency exemption was released
  5. Not any type of insurance premiums, except long-term care insurance (see below).

Note that a medical expense that has been paid or reimbursed by the HSA is not deductible on Schedule A as an itemized medical expense deduction.

Insurance premiums generally do not qualify for HSA tax-free reimbursement, except for:

  1. Long-term care insurance premiums, up to the allowable annual Schedule A amounts as determined by the IRS.
  2. COBRA continuation fees for a dependent
  3. Medicare Part A and Part B premiums, but not Medicare supplement or Medigap insurance, and
  4. Medicare Part D premiums.

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There is no HSA administrator who reviews an HSA owner’s distributions to see if they are qualified distributions. However, an HSA account holder has to keep records that proves that the HSA distribution was done to reimburse or to pay medical expenses in case of an IRS audit. One HSA may be rolled over to another HSA, tax-free within a one-year period if completed within 60 days.

When an HSA distribution is made, the distribution will be reported to the HSA account holder at year- end using IRS Form 1099-SA (Distributions From an HSA, Archer MSA, or a Medicare Advantage MSA). The distribution is then reported by the HSA account holder on IRS Form 8889 (Health Savings Accounts) as part of his or her federal income tax return. Distributions that do not qualify as medical expenses are taxable and reported on Form 1040, Schedule 1, Line 8e and are subject to a 20 percent penalty for HAS account owners under age 65, (unless the HSA account owner is disabled or deceased). Individuals over age 65 do not pay the penalty for non-qualified distributions. A transfer in a divorce is non-taxable and retains its HSA characteristics in the hands of the new spouse accountholder.

HSA account balances at death can transfer to a spouse tax-free and retain their character in the spouse’s hands. The entire fair market value is taxable but not penalized if transferred to anyone other than a surviving spouse. No 10 percent early withdrawal penalty is imposed when withdrawn by the non-spousal beneficiaries. Note that any of the HSA balance used to pay final medical expenses of the deceased HSA account holder within one year of death are not taxable to non-spousal heirs.

A summary of HSA savings account balances is presented:

HSA Savings Account Balances

  1. There is no requirement to use the savings account for medical purposes. The account can therefore accumulate, tax-free, while paying medical expenses out-of-pocket.
  2. The beneficiary rules are: (a) Spouse treats the HSA account as own HSA; and (b) Non-spouse treats the HSA distribution, even if used for medical purposes, as taxable but without a penalty.
  3. IRS Notice 2004-50 states that the reimbursement for qualified medical expenses may occur at any time but these unreimbursed expenses must have occurred after the HSA was first started.

A withdrawal from an account holder’s HSA to pay the medical expenses of a spouse or dependent who is covered under another non-HDHP still qualifies as a tax-free withdrawal. Similarly, one spouse may use his or her HSA to pay the medical expenses of the other spouse, even if the other spouse also has an HSA.

An individual who qualifies for an HSA and who then loses eligibility (to contribute to the HSA because the individual is no longer enrolled in an HDHP) may maintain the HSA, retaining all attributes of tax-free accumulation and tax-free withdrawal for medical reasons.

There is no requirement for an HSA account holder to take any distribution to pay or to get reimbursed for qualified medical expenses. In that case, the HSA retains all attributes of tax-free accumulation and tax-free withdrawals in order to pay future qualified medical expenses, including reimbursements for Medicare Part B monthly premiums and long-term care insurance premiums.

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.

Owning an HSA

For Federal Employees: Owning an HSA