You can view your HSA as a quasi-retirement fund with an added bonus of immediate use for qualified medical expenses. Image: Doidam 10/Shutterstock.com
By: Tyler Weerden, CFEThere tends to be a lot of confusion between Flexible SPENDING Accounts (FSA) and Health SAVINGS Accounts (HSA). While both allow for the use of pre-tax dollars to pay for qualified healthcare expenses, the HSA has benefits that far surpass this feature. November 11 – December 9, 2024 is open season for federal benefits.
When comparing Federal Employee Health Benefit (FEHB) plans, feds should take a close look at their HSA options.
*A note for those approaching retirement, there is a misconception that you cannot change FEHB plans within 5-years of retirement. This is false. Straight from OPM, here are the two requirements to carry FEHB into retirement:
(1) You are entitled to an immediate annuity AND
(2) You have been, “continuously enrolled (or covered as a family member) in any FEHB plan(s) for the 5 years of service immediately before the date the annuity starts, or for the full period(s) of service since his/her first opportunity to enroll (if less than 5 years).”
HSA Eligibility
In order to contribute to an HSA, you must meet the IRS eligibility:
1. You must be covered by a High Deductible Health Plan (HDHP)
2. You cannot have other health insurance coverage
3. You cannot be enrolled in Medicare
4. You cannot be claimed as a dependent on someone else’s tax return
What if I retire? What if I’m already retired? What if I change states? What if I’m abducted by aliens? None of those things matter (for HSA purposes). If you meet these four criteria you can contribute to an HSA. I know many federal retirees who have crossed the finish line, aren’t working a post-retirement job, and still contribute to their HSA (earned income is not a requirement).
What if my spouse has their own non-HDHP insurance through their employer and I have an HDHP family plan that covers my spouse? As long as their non-HDHP doesn’t cover you, you’re still eligible individual and can contribute up to the family limit.
The Pros
The HDHP is your insurance coverage while the HSA is an added feature. With this combination, premiums tend to be less expensive since more of the out-of-pocket (OOP) burden is on you. While this may sound like a downside, for those with few healthcare expenses, their net annual costs can be minimal.
On top of having insurance coverage, the HDHP with an HSA provides:
(1) Premium pass-through (PPT); part of your bi-weekly premium is returned to you
(2) HSA contributions are pre-tax, meaning they reduce your federal taxable income and also your state taxable income (except for CA & NJ)
(3) HSA contributions made via payroll deduction are not subject to FICA/payroll tax
(4) Your contributions can be invested in a variety of investments, similar to an IRA
(5) HSA dollars grow tax-free
(6) It’s yours for life, even if you leave your job, retire, or change to a health plan that’s not HSA eligible, the HSA is portable and stays with you
(7) Unlimited carryforward to the next year – no “use or lose” like with an FSA
(8) No income restrictions to contribute
(9) No Required Minimum Distributions
(10) HSA distributions are tax and penalty-free if used for qualified medical expenses (there are a ton of these QMEs)
(11) Distributions are tax and penalty-free to reimburse yourself for medical expenses that were paid out-of-pocket (OOP) at any time after you established your HSA
(12) Once you reach age 65, distributions are penalty-free even if not used for qualified medical expenses (however, ordinary income tax will apply if for non-medical expenses).
Qualified Medical Expenses
QMEs include items far beyond just typical doctor’s office visits and prescriptions. HSA funds can be used to buy cold medicine, pain reliever, sleep aids, allergy medication, over-the-counter drugs, certain skincare products, heartburn tablets, band-aids, sunscreen, contraceptives, prescriptions, after-sun aloe, etc. If you have a family plan, expenses incurred for you, your spouse, and dependents are all eligible.
Breaking it Down – My Use of the HSA in 2024
(1) I was covered by the FEHB Plan #341 (GEHA HDHP)
(2) I paid bi-weekly health insurance premiums of $71.45
(3) Every month I received a deposit of $83.33 in my HSA account. This amount represents the $1,000 (self-only) premium pass-through (PPT) feature where a portion of your premium is returned. PPT in 2025 for self-only will remain $1,000 and for family plans will be $2,000.
(4) Since the total 2024 HSA contribution limit was $4,150 for self-only, and the $1,000 PPT counts towards the IRS limit, I contributed the remaining allowable amount ($3,150) from my paycheck throughout the year. This $3,150 of personal contributions was not subject to payroll tax and it reduced my taxable income. Contributions went straight from my paycheck to the custodian, HSA Bank. Note: Your personal contributions can go to any HSA custodian, or be rolled over from HSA Bank to a different custodian (Fidelity, Lively, etc.), but with the FEHB GEHA plan, the $1,000/$2,000 PPT will always be sent to HSA Bank.
(5) When the $83.33 PPT and my personal contributions hit my HSA Bank account, they automatically get invested in a low-cost passive index fund (not an investment recommendation). This money is now invested and will grow tax-free, similar to a Roth IRA, but better since those are pre-tax dollars going in. Note: you don’t have to invest your HSA money, you could leave the HSA dollars in cash and use your HSA debit card to pay for QMEs.
(6) When I had medical expenses, I paid OOP, recorded it on a spreadsheet, and saved a picture of the receipt in a cloud folder. I can reimburse myself for these expenses at any time, even if it’s 20-years from now and I’m no longer a government employee and not covered by an HSA eligible plan. The HSA money is mine to use for medical expenses, reimburse myself for expenses paid OOP, or use for anything after age 65 without penalty.
How Much Can You Invest in 2025
$4,300 for self-only plans and $8,550 for family plans. Individuals who will turn 55 in calendar year 2025 can contribute an additional $1,000 catch-up. For spouses with family coverage, each spouse can contribute an additional $1,000 to their individual HSA account. Remember, these contribution amounts are reduced by the PPT.
2025 FEHB Premiums
Here are the 2025 premiums for GEHA HDHP vs. two popular Blue Cross Blue Shield plans.
GEHA HDHP Self-Only (341): 2025 bi-weekly premium $76.27 ($1,983 annual) – an increase of $4.82
GEHA HDHP Family (342): 2025 bi-weekly premium $201.52 ($5,239 annual) – an increase of $12.74
BCBS Basic Self-Only (111): 2025 bi-weekly premium $113.16 ($2,942 annual) – an increase of $17.42
BCBS Basic Family (112): 2025 bi-weekly premium $303.61 ($7,893) – an increase of $41.01
BCBS Standard Self-Only (104): 2025 bi-weekly premium $174.81 ($4,545 annual) – an increase of $24.02
BCBS Standard Family (105): 2025 bi-weekly premium $424.65 ($11,040 annual) – an increase of $53.97
With the PPT factored in to the HDHP plans, the self-only net annual premium in 2025 will be $983 and the net annual premium for a family plan will be $3,239.
Preventative Care
Do not ignore your health because you’re worried about OOP costs! Getting sick or injured will cost you a lot more than the money saved and invested with the HSA. With the HDHP, things like annual physical exams, routine screenings, immunizations, two dental cleanings, etc. are generally covered by insurance before hitting your deductible, without any cost sharing, coinsurance, or copays.
HDHP Costs
If your goal is to have the absolute least amount of OOP expense, an HDHP is probably not the right fit. Everyone’s health situation and medical needs are different. Even someone in great health may not want to roll the dice on the possibility of paying OOP regardless of the lower premiums, tax savings, and investment feature. However, make sure you do your homework using the OPM FEHB plan comparison site. There are other plans that aren’t labeled HDHP and still have deductibles of $600/$1,200. Once you factor in the HDHP’s $1,000/$2,000 PPT plus lower bi-weekly premiums, your regular plan could cost you more on a net basis than the HDHP.
Deductible – Just like with car insurance, the deductible is the amount you pay OOP before plan benefits begin. The GEHA HDHP 2025 in-network deductible is $1,650 for self-only and $3,300 for self plus one and family coverage.
Coinsurance – Coinsurance kicks in after you’ve met your deductible. Primary care office visits, labs, x-rays, emergency room visits, and specialists have a 5% coinsurance if in-network. If you visit the doctor’s office and they bill $100, but the in-network provider has an agreement with GEHA to accept $80 as the allowable amount, you’ll pay $80 if you haven’t met your deductible yet. This $80 will be applied towards your annual deductible. If you have met your annual deductible ($1,650/$3,300) and the coinsurance is 5% of the allowable amount, you would pay $4.
Maximum Out-of-Pocket/Catastrophic Protection – This is the maximum you’ll pay for coinsurance, co-pays, and deductibles (medical care and prescriptions) combined before insurance pays 100% of covered services. The in-network 2025 OOP maximum is $6,000 for self-only and $12,000 for family coverage. Out of network is $8,500 and $17,000. Remember, this catastrophic limit is for coinsurance, co-pays, and deductibles combined. Insurance will still kick-in once you reach your annual $1,650/$3,300 deductible.
What If I Withdraw HSA Money Before Age 65 for Non-Medical Purposes?
Generally, this will cost you ordinary income tax and a 20% penalty.
What If I Don’t Want to Invest the Money?
You don’t have to. You can still come out ahead by paying for QMEs with dollars that were never taxed.
What If I’m Not Healthy?
While this is a highly personal decision, it’s important to note that most traditional insurance policies won’t exclude co-pays and drug costs after hitting the annual catastrophic limit. This means that with a traditional plan, you could pay your catastrophic limit and still be on the hook for co-pays and prescriptions. On the other hand, OPM states that, “With an HDHP, once you hit the catastrophic limit, there is no out-of-pocket expense for covered in-network services.”
What If I’m Too Healthy?
While you may be in great shape, it’s unlikely that you’ll never need money for any QME. Remember, you can always reimburse yourself at any time in the future for those every day common QMEs. Why not buy them with pre-tax dollars? Also, HSA funds can also be used to pay for Medicare Part B and Part D premiums and long-term care (LTC) insurance premiums. The odds are good that sometime before you die, you’ll have some medical expenses that could be paid with tax-free money that compounded for decades. Worse-case scenario, at age 65 your HSA changes to a quasi-traditional IRA or pre-tax 401(k) where you can use the money for any purpose (not just QMEs) and you’ll only pay income tax (no 20% penalty for non-QME spending).
Cons
(1) California & NJ don’t recognize the HSA and your contributions won’t reduce your state income tax. Dividends, interest, and capital gains are also taxable at the state level. You’ll still reap the federal tax benefits.
(2) If you die, your spouse can inherit your HSA as if it was their own. If they die, or if you have a primary non-spouse beneficiary, the account is no longer classified as an HSA when you die. When this happens, the fair market value of the account becomes taxable to the beneficiary in the year in which you die. This could create a tax issue for non-spouse beneficiaries.
Tax Time
You’ll receive a 5498-SA from your HSA custodian showing how much you contributed. A 1099-SA will be issued if you took distributions from your account. You or your accountant will need to file IRS Form 8889 documenting your contributions, your employer’s contributions, any distributions taken, and any penalties owed. You don’t have to provide receipts at tax time showing that you paid for qualified medical expenses, however, you’ll still want to save the receipts and have a good tracking system in place in the event of an audit.
Big Picture
You can view your HSA as a quasi-retirement fund with an added bonus of immediate use for QMEs. At some point we will all have some type of medical expense, whether it’s long-term care, Medicare premiums, or extra sunscreen for all those retirement cruises. If your health situation allows, consider taking advantage of immediate tax savings, lower premiums, and tax-free investment growth.
Tyler Weerden, CFE is a financial planner and the owner of Layered Financial, a Registered Investment Advisory firm. In addition to being a financial planner, Tyler is a full-time federal agent with 15 years of law enforcement experience on the local, state, and federal level. He has served in both domestic and overseas Foreign Service assignments. Tyler has experience with local, state, and federal pension systems, 457(b) Deferred Compensation, the federal Thrift Savings Plan (TSP), Individual Retirement Arrangements (IRAs), Health Savings Accounts (HSAs), and invests in rental real estate. He holds a Bachelor of Science degree, a Master of Science degree, passed the Series 65 exam, and is a Certified Fraud Examiner (CFE).
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