Federal workers weigh HDHPs with HSAs as premiums surge 13.5%

With open enrollment less than a month away and the average premium increase at 13.5%, millions of federal employees are reevaluating their health insurance plans. While health insurance may not be the most exhilarating topic, there is something exciting about having a health insurance plan that can reduce your taxes while also providing tax-free investment growth. These are two benefits of a Health Savings Account, which according to the Consumer Financial Protection Bureau have surged in popularity, with the number of accounts increasing over 500% since 2013.

What's the Big Deal?

Selecting a High Deductible Health Plan with an HSA feature provides: (1) Generally less expensive bi-weekly premiums, (2) part of your bi-weekly premium is returned to you, (3) HSA contributions are pre-tax (reducing your taxable income), (4) HSA contributions made via payroll deduction are not subject to payroll tax, (5) you can invest your contributions in a variety of investments, (6) your money grows tax-free, (7) the HSA is yours and is completely portable - you keep it even if you leave the government or change to a health plan that's not HSA eligible, (8) no "use or lose" like with an FSA, (9) no income restrictions to contribute, (10) no Required Minimum Distributions, (11) HSA distributions are tax and penalty-free if used for qualified medical expenses (there are a lot of expenses that qualify), (12) distributions are tax and penalty-free to reimburse yourself for medical expenses that were paid out-of-pocket at any time after you established your HSA, and (13) 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).

HSA Eligibility

1. Covered by a High Deductible Health Plan
2. No other health insurance coverage
3. Not enrolled in Medicare
4. Can't be claimed as a dependent on someone else's tax return

Qualified Medical Expenses

Don't think of just traditional healthcare/medical expenses. Qualified expenses include a wide variety of items to include 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. For a full list of qualified medical expenses see IRS Publication 521 or visit HSA Store. If you have a family plan, expenses incurred for you, your spouse, and dependents are all eligible.

How Does This Work? My Real-Life 2024 Example.

(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 qualified medical expenses.

(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.

I view my HSA as a quasi-retirement fund, specifically aimed at handling medical expenses, Medicare Part B premiums, and/or long-term care. In extreme cases, it could even act as an emergency fund since I can technically withdraw money tax and penalty-free for all of the documented OOP medical expenses I've paid since I was first covered in 2020.

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.