Delivered on: Tuesday, March 24, 2026

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The 1-2-3 Tax Punch of the Health Savings Account

What you must know about HSAs before the next FEHB Open Season

• CONCEPT: How tax laws make HSAs possible (and lucrative)
• FUNDING: How contributions are made and managed
• USE: How money can be used from this account later
• CONTROL: How HSAs work if you retire or leave the government

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Prefer to read instead? A Transcript of this Webinar is Below:

Hello and welcome everyone to the FedImpact webinar today on The 1-2-3 Tax Punch of the Health Savings Account. This is an unusual time of year to be talking about the HSA simply because normally this comes out during open season.

The problem with open season, it's at the end of the year, we're getting into the holidays. Things are a little bit more chaotic than all of us would like to believe that they actually are. And that might not be the right time to really stop and think about the HSA.

And some of you are going to be learning about this for the first time or really doing a deep dive for the first time today. We're delighted to be able to have all of you to be able to talk about this topic.

And I hope that as you have coworkers and friends that are making their decisions as they get closer to open season, that you'll also share the replay of this webinar so that they have the benefit of learning this information as well.

Real quick, you guys know me. I'm Chris Kowalik, the founder of ProFeds. If you're a regular webinar attendee, you know that we cover a wide variety of different topics that are on top of minds of many federal employees.

And so of course this topic, while this time of year might not have the HSA top of mind for you, I know taxes are always top of mind for employees and retirees. We're going to be able to get into the details today.

The 1-2-3 Tax Punch of the Health Savings Account

The 1-2-3 Tax Punch of the Health Savings Account, all the things that you have to know before the next open season. I want to give just a little bit of background of why I chose to do this particular topic. What I want to start with is something that might sound a little bit uncomfortable.

A lot of federal employees think they have “handled” healthcare in retirement simply because they have the FEHB plan. And I get it. FEHB is quite wonderful and it's one of the best benefits that you have. But here's the problem.

Having FEHB doesn't mean that healthcare won't be one of your biggest expenses in retirement. It just means you'll still be paying for it in a different way.

We're going to get into all the details about this, but a lot of this came up because I was speaking with a federal employee not too long ago. They're smart, they're experienced, they're doing all of the right things.

They're shoving a boatload of money into the thrift savings plan. They have a clear retirement timeline. They have a retirement budget. They've thought about all the things. They're very confident about where they stood. And then we started talking about healthcare.

And I asked him, “How much do you think you'll spend on healthcare in retirement?” And he paused and he said, “Well, gosh, I don't know. I just figured FEHB would take care of most of it.” And then we walked through it, right?

The premiums, the out of-pocket expenses, the prescriptions, all the unknowns that come with healthcare. And for the first time, I could kind of see it on his face. This wasn't a small expense. This was a major line item for him. And then came the bigger realization.

He had access to one of the most tax efficient tools available to help prepare for those costs. And he had almost just ignored it, not because it wasn't valuable, but because no one had ever explained it in a way that made sense. And that tool is the health savings account, and that's what we're going to be talking about today.

I want to challenge you to think about the HSA maybe a little differently than you have in the past, or if this is really your first entree into the HSA that you just come in, nice open mind of how all this is going to work, because this isn't just another health plan that you have access to in the open season.

This is one of the few opportunities that you have to prepare for all of those healthcare costs with tax-free dollars, right?

And being able to build this separate bucket specifically for retirement healthcare and potentially create a stream of tax-free income later in life to help pay for a lot of these things.

But you can only do that if you understand how it actually works. Today we're going to break this down clearly and simply talking about how the HSA really works, how the government contributes to it, how all the money can be used, and most importantly, whether it's something you should be paying closer attention to before your next open season decision.

Because frankly, for many federal employees, the mistake isn't choosing the wrong FEHB plan. It's not realizing what they had access to in the first place.

Agenda

That's what we're going to be talking about today. A lot to unpack. Let's jump into our agenda. So kind of high level overview of what we're going to be talking about.

Of course, we're going to talk about the concept of the HSA and the tax laws that make the HSA possible and really lucrative for you to consider how the HSA is funded through contributions from you, from your employer, and how all those monies are managed, then how to use the HSA, how the money can be used from this account later, and then control.

This is going to be an important one for a lot of you, how the HSAs work if you retire or leave government service.

High Level Overview

Let's really talk about that high level overview of the HSA. And it's hard because there's all these little spokes that come off of this. I'm going to dive deeper into these. Hang with me at just this high level overview for a moment and then we'll jump into the details.

Overview

A quick overview of the HSA. It is essentially a tax advantage savings account that is designed to help you pay for healthcare expenses either now or later.

It's different than the flexible spending account. Many of you have participated in the FSA for many years. It allows you to have tax-free contributions to an account that as long as you use it for qualified medical expenses in that year, then you're good. The challenge is it's not a long-term program, and so you're going to see some of the differences.

And we'll do a little side-by-side comparison here in just a moment. Unlike many other tax advantaged accounts, your income level does not have any effect on your eligibility to have an HSA.

When we think of accounts like the Roth IRA out in the private sector, there's only so much money that you can make to be able to be qualified to contribute to accounts like that. That doesn't play a factor at all.

All of our earners here, no matter if you feel like you're a low earner or a high earner, you have access to an HSA. And it's also important to realize that HSAs are available to both employees and to retirees.

That is one of the big differences between the HSA and the FSA, because this is going to be something a little longer term than I think maybe you're used to.

And the money that is accumulated in this health savings account can be used to pay for what the IRS would deem as qualified medical expenses. We'll talk a little bit more about those here in a moment, but that's the whole purpose of this account is to give you a tax incentive to be able to help pay for healthcare later.

Account Ownership

Let's talk briefly about account ownership. The money in your health savings account, if you choose to establish one, this belongs to you. The balance is going to carry over every year, so there's no more use it or lose it like you have in the flexible spending account.

It is not tied to your job or to your employer. You can take it with you even if you decide to leave government service or you retire. And you get to be the decision maker on how this money is going to be used.

You can save the money, you can invest the money, and you can choose whether you use it now or you use it later. There's a lot of flexibility in this. And again, we're going to dive into the details of this here momentarily.

In the blue box on the right-hand side, there's something important that I want to just put out there for everyone. If you decide to go into an HSA and maybe you're really looking at this long-term opportunity, you want to make sure that you keep every blessed receipt for any qualified medical expenses that you ever incur while you have an HSA.

Regardless if you're going to claim those for reimbursement or not from the HSA account, you want to make sure that you are saving all of those receipts. And here's why. The IRS has no time limit for you to deduct those qualified medical expenses.

You can reimburse yourself from your HSA account at any time in the future for past expenses. Those expenses had to be incurred while you had the HSA, so there are some limits here, but if you find yourself in a situation many, many years down the road, even far into retirement, as long as you kept all of those receipts, you are able to claim those past expenses in a given tax year.

You're able to get reimbursed tax-free from the HSA based on past expenses from perhaps many years or even decades ago.

We'll talk a little bit more about this concept as we get into the qualified medical expenses.

Qualified Medical Expenses

The HSA funds can be used for lots of different type of healthcare costs, doctor's visits, prescription drugs, all the normal things that we think about.

And if you're familiar with the flexible spending account and the rules that go along with qualified medical expenses for the FSA, they're the exact same qualified medical expenses for the HSA.

You can find them by going to this link on the right-hand side. The IRS's link is not all that long, so I decided to go ahead and put the real link here. Sometimes these links to different resources get really long, and so we might shrink them a little bit.

But in this case, you're able to go directly to the IRS' site and be able to poke around and see what types of expenses you could incur that allow you to take money out of your HSA to reimburse yourself, again, now or later.

As far as those qualified medical expenses, it is important to realize that you cannot use the HSA to pay your FEHB premiums. It would seem to me that that is a medical expense, but that's not what the IRS deems as a medical expense. That's just the insurance for the medical expense later.

The premium itself cannot be paid with HSA dollars, but out of pocket expenses, when you go to the doctor and you have copays and co-insurance and those types of things, that is what can be used from the HSA account.

You can use the HSA to pay for all those qualified medical expenses for your tax dependents, even if they're not covered under your FEHB plan, right? Maybe you have a spouse or children who are on their own plan, right?

Maybe your spouse has a health plan through work and them and your children are covered under your spouse's plan, but you have FEHB.

You can still use the HSA that you have created and funded through your FEHB plan to pay for qualified medical expenses of other people who are your tax dependents.

It's not just you and not just the people covered under your FEHB plan that you can pay those expenses for.

And again, you always want to keep your receipts. One, in case you're audited, of course, we want to be able to justify any of the reimbursements that you've taken from the HSA, but you want to make sure that you're keeping those receipts in a good spot so that you can use them for a future tax year if you decide to do that.

Health Savings Account (HSA) and the Flexible Spending Account (FSA)

The first little subtopic that we're going to talk about is we're going to do a comparison between the health savings account and the flexible spending account, because I think that for many of you, there's at least more familiarity with the FSA.

It's a more widely used plan because it can be attached to most of the FEHB plans that are available out there. You've probably at least heard of the FSA, and you might be curious how it compares to what we're talking about today.

Comparing the HSA and the FSA

When we're comparing the HSA and the FSA, there are a number of different ways that they are similar and quite different. For ownership, under the HSA, you own this account.

Under the FSA, your employer, in this case, the government owns that money, that account itself. The challenge is, of course, when you leave your employer, what happens? We'll talk about that here in a moment.

The next part, the next question is, does it require you to be enrolled in a high deductible health plan? We'll talk more about HDHPs here in a moment, but under the HSA, the answer is yes.

You are required to be in a high deductible plan, but under the FSA, the answer's no. And that's why it's such a more widely used program because it can be attached to regular, more traditional health insurance under FEHB.

As far as how the money rolls over each year, under the HSA, every year, whatever's in the account just continues to roll.

There is no limit what-so-ever. Under the FSA, I'll say that normally it does not roll over, but there's a small portion each year that you're allowed to carry over into the next year, but it is very, very limited.

As far as the accounts being portable, if you leave your job, we've already determined that the HSA is in fact portable if you retire or otherwise leave government service, whereas the flexible spending account is not.

Once you are no longer working for the federal government, regardless of the reason why, you can submit receipts up to services received up to that point when you left.

But after that, once those claims are processed, then whatever was remaining in the account is forfeited back to the government. As far as contributions allowed in both plans, the HSA and the FSA, you are allowed to contribute your own money into those plans.

As far as how the money can be invested or can it be invested at all, under the HSA, the answer is yes, it can, but under the flexible spending account, it cannot. It's just sitting there waiting to be used and there's a short timeline for you to use it, right?

You're going to have to use it before the year ends, otherwise there's very little rollover that happens to the next year.

But this last line item that we see here on the difference between these two accounts is really the linchpin that makes hopefully your eyes wide open to the health savings account.

As far as the tax advantages, both the HSA and the FSA have tax advantages to them, but the HSA allows you to have tax-free contributions, tax-free growth, and tax-free withdrawals from that account. That's why we call it the triple tax threat.

We'll talk a little bit more in detail on this, but this is pretty incredible. Under the flexible spending account, still a good deal, right? But you only have tax-free contributions, and so important to realize where the tax savings are and how that's going to be materialized for you when you go to use the money.

Funding the Health Savings Account (HSA)

Let's talk about funding the HSA. How does the money get into the account itself? When it comes to funding the HSA, there's going to be part of your FEHB plan where that premium automatically gets deposited into your HSA account, and they do that every single pay period.

This concept is called premium pass through, and don't confuse it with premium conversion, which is what happens that allows you to pay your FEHB premium tax free.

That's a different type of plan that everybody in FEHB gets. With the HSA, when you enroll in that high deductible plan, which again, we're going to talk about here in just a moment, when you enroll in that, part of the premium that you are paying has a built-in amount that passes through the insurance company and goes into your HSA account.

It's a forced savings for you through the HSA. But on top of that, you're also able to contribute additional money to your HSA. You can do that from your paycheck directly.

And here's the deal. When you do that through your paycheck, the money that you are contributing to this, the extra money that you are contributing is not reported as income to you. And that's great. It makes taxes quite simple.

You don't have to deduct anything because it was never reported as income to you to begin with. But here's the real bonus to doing that from your paycheck. T

hat is, you avoid the FICA tax, which is Medicare and Social Security that you're contributing to. And so that 7.65%, you only get that tax relief if the extra money that you put into your HSA comes directly from your paycheck. You can contribute outside of your paycheck from your own personal funds if you wish.

And in that case, if you do that, the amount that you contribute is still reported as income to you, and then you have a tax deduction that you'll claim on your tax return. But if you pay any money from your personal funds, you don't get that 7.65% FICA tax relief. You might as well do it directly from your paycheck and get even another tax relief on that money.

HSA Contribution Limits

Let's talk about contribution limits, how much you can put in. Each year, the IRS sets these HSA contribution limits, and that is the total amount that's being deposited into the HSA.

That includes your plan's premium pass through, that built in forced savings that they take from you in your premium, and then part of it passes through into your HSA account, and it also includes your own personal contributions to the HSA account.

In total, someone who has self-only coverage can put in $4,400 a year. If you have self-plus one or family coverage, the amount is the same.

It's $8,750 for the year. And if you have to happen to be 55 or older by the end of this year, December 31st of 2026, you're able to contribute an extra thousand dollars a year on top of the limits above.

That gives you an idea of the kind of money that can go into this. It's certainly not as high as the thrift savings plan and other accounts like that, but it's still a pretty significant amount of money.

Federal Tax Advantages

Let's talk about the federal tax advantages. I touched on this as we were comparing the HSA and the FSA, but when the money goes into the HSA, you do not pay tax on the contributions. It's either not reported as income at all to you or you get a tax deduction depending on how you fund that account.

The money is going to continue to grow tax-free, so you don't report the growth on that money every year as you file your taxes. It's as if the money doesn't exist. Any interest or investment gains are not taxed along the way, which is really nice.

And then the really nice part is that all the money comes out tax-free to you. You don't pay tax when the money comes to you as long as you used it for qualified medical expenses.

And we'll talk about what it looks like if you happen to use it for non-qualified medical expenses, maybe by accident or you just needed the money.

We'll talk about that here in just a bit, but I do want to address the asterisk that we have on the federal tax advantages.

This is of course at the federal tax level. Most states acknowledge the federal tax advantage and they too will allow you to have that tax advantage at the state level, but there are certain states, namely California and New Jersey, that are going to treat HSA contributions or that income that you get from HSAs differently.

If you happen to be one of those two states, that should hopefully make your ears perk up and realize that you might not quite have the same state tax advantage that everyone else might have, but at the federal level, this will all still be true for you.

High Deductible Health Plan (HDHP)

Let's talk about these high deductible health plans. This is probably the part that is rattling for a lot of people because they hear high deductible and they're thinking, “Gosh, my out of-pocket expenses are going to be through the roof because I'm going to have to hit this high deductible before the plan starts paying.”

Let's jump into the details. To qualify to contribute to an HSA that we've been talking about, you have to have what's called an HSA compatible high deductible health plan. And we'll talk about what makes it compatible here in a moment.

It's also important to realize you also cannot be any of these five descriptions. You cannot be enrolled in another health plan that is not HSA eligible. You cannot be enrolled in a normal flexible spending account, which is a healthcare flexible spending account, which is typically the one that you hear about.

You cannot be enrolled in Medicare. You can't be receiving benefits from the VA or the Indian Health Services, and you cannot be claimed as a dependent on someone else's tax return.

As long as you meet those requirements, you are eligible to enroll in a high deductible health plan and have that HSA tax component that we've been talking about today. With a high deductible health plan, there are typically lower monthly premiums, but higher deductibles before the insurance company starts paying.

And when we talked about HSA compatible plans, there are some limits that the IRS has set for what qualifies as an HDHP plan that can be paired with a health savings account.

The minimum deductible for a self-only plan is $1,700. A self plus one or a family plan is 3,400. You're going to be on the hook for a higher dollar amount from a deductible standpoint. And at the same time, the maximum out of-pocket expense is also capped.

You have this range between the deductible that you're going to have to be responsible for, but how much out of-pocket they can really get from you, right? That part's good.

For a self-only plan, that's $8,500. For a self plus one or a family plan, it's 17,000. That number might be kind of shocking to you, and it's all going to be part of this equation.

The HDHP/HSA Options in FEHB

Let's kind of jump into some of the details. With a high deductible health plan/HSA option within FEHB, there are 13 high deductible health plans that meet that HSA criteria.

There are some others that meet a different criteria, which is a health reimbursement account. And we are not going to be talking about that today. That will become a little bit more confusing for everyone.

And so we're just going to be focused on the HSA styled plans. There are 10 state or regional plans, and then there are three nationwide plans, so GEHA, Mail Handlers, and Aetna.

I would encourage you to just do a side-by-side comparison of your FEHB plan. You can compare these three, the HDHP plans that I have listed here. You can compare FEHB premiums and all the features of the plans that you currently have compared to one of these or a couple of these.

I would encourage you to do that. OPM's link is actually really long and ugly to be able to get to this comparison feature.We just made a quick short link here.

You can go to fedimpact.com/fehb-compare, and that will redirect you directly to the OPM site where you can compare those health plans. In an ideal world, I could have one slide that shows you the comparison of all of these.

I tried my little hard out to be able to get that up here for you, but it just made the text too darn small. Here's what I did. I went ahead and pulled the three nationwide plans and the main features of those plans so that you had those nice and handy here in the material.

This is the GEHA, high deductible plan, Mail Handlers, and Aetna. I am not going to go through these numbers today on the webinar, but I wanted you to have them handy.

Of course, you can find all of this on the FEHB website, but to be able to just sit with this a little bit and get the lay of the land of all the expectations of you for a plan like this, I wanted to have these nice and handy for you.

How HSA Money Grows

Let's talk a little bit about how the health savings account money grows. There are really three different avenues that you can go with respect to your HSA money, and all of them have tax advantages. It's just how much of the tax advantage you get.

Spend It

The first is that you can spend it. You can use it along the way as you build money in the HSA, you incur medical expenses, you use money from the HSA that year and pay those medical expenses.

The money doesn't really grow, it's being used along the way. That's kind of what you're doing with the flexible spending account if you happen to have that account right now.

Save It

The other option is that you could save the money. This is the automatic, the default option, if you will. And you need to know that this money earns very little while it is sitting in that account.

It is way behind inflation. You'll see it here in a case study example that I'll show here in a moment, but it is something that's pretty darn important for you to realize that the purchasing power of your money over a long period of time, while it's just been sitting in the save bucket, is not going to have kept up with the actual cost of goods and services from a healthcare standpoint.

You're still getting a great tax advantage, but did you get the most tax advantage that you could?

Invest It

Let's talk about the invested option. You have a choice to do this. You can either invest inside or outside of the HSA. There are different features available in different types of investments, but know that you can make and lose money in investment accounts, right? You have to think about this It's probably a lot like you do the Thrift Savings Plan.

Over the long term, is the risk worth it? And do I feel like I can overcome that with time and compound interest? I mean, that's the whole idea of investing over the long term.

Again, either way, whether you decide to spend the money along the way, save it or invest it so that it grows faster, you still got the initial tax advantage, that immediate tax advantage when you funded the account, because you did not pay tax on that money when it went into your account.

The question is, how good is the tax advantage going to be on the back end when you take the money out? That's what we're going to focus on today.

Case Study

To do that, I'm going to use a little bit of a case study here and we're just going to put a scenario together. Yours of course might be different, but if you just kind of sit back and let this absorb into you, I think you'll see where the real opportunities are within the HSA.

We're going to say this lady, Hannah, is 45 years old and maybe she got the link to this webinar replay from a friend, a coworker, and they said, “Hey, I heard you asking questions about the HSA.

Listen to this webinar and give it a shot. Let's see what this looks like.” She's looking at her and her husband. They're both pretty healthy and they're covered under the FEHB plan that she has. T

hey've been on Blue Cross Blue Shield standards since she was hired. It's a very well known program. Lots of federal employees are in Blue Cross and still she keeps coming back to this HSA thing with a high deductible plan.

And so she's considering switching to the GEHA plan. Of the HDHP plans within FEHB, GEHA is the most popular of the HDHP plans. I'm just going to use that one as an example, but the concept will hold true for what we're going to look at for Ms. Hannah.

What she wants to do is examine the various costs and the benefits to see if making a change in the upcoming open season makes sense for her and her husband.

What we're going to do is we're going to do a high level comparison between two self plus one plans. Remember, they don't have any eligible children. They're under a self plus one with Blue Cross Blue Shield right now.

And they're considering the self plus one GEHA, high deductible health plan with an HSA. These are the two that we're going to compare.

So as far as the Blue Cross Blue Shield plan, with respect to the premium, we're looking at $10,683 a year. The GEHA high deductible plan is 4,562. We do have a significantly lower premium, but we know we're on the hook for a higher deductible, right? Under Blue Cross, there's a $700 deductible. GEHA, we're looking at 3,600.

We have to kind of reconcile that in our brain of, are we willing to pay that 3,600 out of pocket? But when you look at the 4,500 plus the 3,600, we're still under that 10,000. Even if we add the $700 deductible for the Blue Cross plan, we're still under that amount. It's a little bit of a balancing act of what we're willing to do.

Interestingly, both plans have a $12,000 max out-of-pocket. That's kind of that pegging of the out of-pocket meter here where once you hit that 12,000, then insurance picks up 100% at that point. There are actually some differences between Blue Cross and GEHA out of pocket as far as the styles of the plan.

If there are still preventative care and things like that, some of that's treated a little bit differently, but for the most part, that out of pocket includes copays, deductibles, co-insurance, those types of things. What we've talked about so far, the premium, the deductible, and the max out of pocket is the actual health plan that Hannah is considering, right? Blue Cross versus GEHA.

The two areas at the bottom of this chart are the extra plan that's being created, the account, the savings account that is being created alongside at least one of the accounts, one of the FEHB plans.

With Blue Cross Blue Shield, this does not qualify for the health savings account. Of course we see no funding, no contribution, anything like that. But under the GEHA plan, there's an automatic $2,000 that is taken from that $4,562 premium. 2,000 of that is forced into the health savings account.

Your premium is really 2,562 with $2,000 that you're being forced to contribute to the HSA, which is the whole purpose of the HSA. It's not a big deal, but I want you to understand it's not extra money on top of the 4,562.

That's actually part of that number. But then remember, there's extra money that you can contribute if you choose to beef up that savings account.

The HSA contribution that you personally can make, if you are in the GEHA plan, would be up to an additional 6,750 for that year. So a total of $8,750 can go into the HSA and based on how the GEHA plan is put together, we know that 2,000 of that is going to come from GEHA because it passed through them to get into the HSA from your premium.

They took 2,000 of that and dumped it into your savings account for you to be able to use later. And you can put in the extra 6,750 to fully fund the HSA in a given year.

This is what Hannah's looking at. And she's like, okay, the opportunity that I have to maybe grow this HSA account over a long period of time looks pretty cool. I think I could probably handle this $12,000 out of pocket. I've got good savings. If I had a year that I really hit that, then yes, I could handle that. I wouldn't want that to be every year.

That wouldn't make a lot of financial sense. But in the event that something happened, I would be able to pay that $12,000 out of pocket for co-insurance, copays, that type of thing.

She's really kind of leaning towards this GEHA high deductible plan, and still there's a lot to consider because she doesn't know what the end tax result is going to be, where the real tax advantage is of that HSA. That's what we're going to talk about next.

When we think about how Hannah is going to decide what plan is right for her, she has to look at her current health situation, right? How many times does she go to the doctor? What prescriptions is she on? Is she in really tight provider networks? Are those people covered?

There's all sorts of considerations. And this is true for any FEHP decision that you're making, not just if you're thinking about a high deductible plan, but something to at least consider, how would you currently be treated if you are under an HDHP plan with an HSA compared to what you're doing right now in your normal FEHB plan, your “traditional plan.”

We also want to make sure that Hannah and her husband have the ability to pay cash for those larger out of-pocket maximums if it happens in a given year, right?

We don't want her to be cash poor and not have any money to be able to pay those things because yeah, we might have saved on taxes, but we don't have the money to actually pay for the services, which would not be good.

We also have to look to Hannah and her husband to say, does the predictability of the traditional FEHB plans feel better or does the opportunity for the tax advantage feel better under the HDHP?

And this, yeah, numbers play a role in this decision, but this sometimes is just a gut reaction and how people tolerate risk and opportunities.

And if it makes them absolutely crazy to think about paying out of pocket early in the year as they're receiving services before they've hit that higher deductible, then maybe a traditional plan would be better for them, right?

But we have to at least include that in the equation and really is the tax incentive great enough for them in their own mind to allow Hannah to bear some more risk today by enrolling in this high deductible plan?

These are a lot of the questions that Hannah needs to be thinking about. And of course, she needs to be talking with her husband and like being on the same page about how all that works because there is a lot that goes into this and we don't want anyone to be surprised.

When we think about, is the tax advantage worth it enough to go through the pain of maybe having to take a little bit more risk now and pay more out of pocket for some healthcare, is it worth it at 65? Well, there are three routes that Hannah can take.

And in all three, in this example that we're going to use, we're going to assume that she contributed $8,750 a year into her HSA for the next 20 years.

She's 45 now, she will be 65, presumably she's going to be Medicare age, assuming that that doesn't change between now and then, and that is the time that we're going to kind of evaluate what things look like.

And we're going to do so by looking at four different areas, contributions, how she handles qualified medical expenses, what the interest rate is that's happening on that money and what the balance is going to be at 65. Let's start with Hannah being a spender.

In the spender mentality, she is going to use her HSA now to pay for qualified medical expenses that she incurs now. From a contribution standpoint, that $8,750 for 20 years is $175,200.

That is how much she has contributed either through premium pass through and of course a contribution from her personal funds as well. She did that through her payroll deduction and got the FICA tax relief and all of those good things, but $175,200 went into the account.

She's going to use that HSA money to pay for qualified medical expenses along the way. There really is no interest rate per se because she's using the money right along the same time that she's saving the money.

I'm going to say it's not applicable here. There technically is an interest rate, but the money's not going to be in the account long enough to benefit from it.

Presumably at 65, she's going to have no money in there because she used all the money along the way. That's if Hannah is a spender. Let's see what it looks like when Hannah saves the money. Remember, she put the same amount of money in as before, 175,200.

She decided to leave the money in the account and pay any of the out of-pocket expenses that she incurs within those 20 years out of pocket. She's got the ability to handle paying the out of-pocket expenses now.

And along the way, she's going to have different types of interest rates within the HSA. When she has just a little bit in the account, the interest rate is much lower. I'll say it's “much higher” when you get more than 50,000 in the account, but it's still not good. It's still at best a half a percent here.

When it comes time to look at the 175,200 that she has at the end of her 20 years, she's going to have somewhere between $176,083 and $184,295. And you're thinking over 20 years, that's all it's grown to. When I tell you that if you put it in the default savings bucket that the HSA has for you, the money's pretty much just sitting there. It's not growing exponentially.

You're not going to see, like you may see in the thrift savings plan. If you think of what things cost 20 years from now, what you've essentially done by not having an interest rate that keeps up with inflation, you have essentially reduced the purchasing power of your money. It won't go as far. Say $180,000 20 years from now will not go the same distance as it would today.

There's a trade-off here. Hannah doesn't maybe love that. She was hoping that account balance would be a lot higher, but she still knows that she's going to have access to all of that money tax-free when she goes to retire, which is still a huge perk, regardless of how big the bucket is.

Let's look at the investment option that Hannah would have. Again, still contributed $175,200 over those same 20 years. She paid out of pocket along the way for any medical expenses that she incurred, but because she chose to invest the money, she gets the benefit of a higher interest rate, right?

And these are rates of return on investment products. It may not be an interest rate like a bank would provide to you, but similar to what you get in the thrift savings plan.

You guys know there are all sorts of different investments out there. I just chose kind of a range of still very modest growth, five to 8% to give you an idea of how that money would grow over time.

You might be way more aggressive than this and your ending balance might be much more significant than what I've illustrated here, but I wanted to give something reasonable, at least a bracketing between five and 8% that you could get an idea of what the money could grow to.

In this case, even with these modest rates of return, we're looking at somewhere between 300,000 and 430,000 of an ending balance that again, all of that is tax-free. Not just the 175,000 that she put into the account, but all of the growth on that money is tax-free as well.

Hopefully you can see that even making the decision to get into a high deductible plan with an HSA, there's still this other layer of decision that you need to make. And a lot of it comes down to what you are willing to do now to afford yourself an opportunity later that may be quite lucrative, right?

Three different ways to be able to invest and Hannah is free to choose and she can of course change her mind throughout the process. Maybe she starts by spending the money along the way and then she's like, “Oh gosh, I really should be saving more of this so that it's tax-free later when maybe I really, really need it.”

And then maybe she invests. And it's not an all or nothing thing, but I've kind of shown it in that respect so that you can see where the real differences are between these three modes that Hannah might find herself in.

Using HSA Funds

Let's shift gears here a little bit and talk about using the HSA funds. We've already talked about the qualified medical expense requirements of the IRS. I'm not going to review that part again, but I do want to talk briefly about what things look like if you use funds for non-qualified medical expenses.

Using HSA Funds for Non-Qualified Medical Medical Expenses

Let's say that you know what you're supposed to spend it on and you choose to do something else with the money, right? Maybe they're medical expenses, but they're not on the list. Maybe they're not medical expenses at all, and you chose to take the money out of the HSA.

The IRS is going to take away some of the tax advantage on that money, however much you took out. If you take the money out before the age of 65, you are going to pay income tax on that money.

You're going to have to claim that as income that year, and that may push you into a different tax bracket. That just may add a layer of tax that you were hoping not to have to pay that year.

But on top of that, you're also going to have a 20% penalty on any of that money that you took out of the HSA for reasons it wasn't intended for. If you happen to be after the age of 65, you can take money out of the HSA. You can use it for other things, but you're still going to pay income tax on it.

There's not going to be a penalty assessed to you, but you are going to pay income tax, which listen, that's one of the three cool parts of the HSA, which is all that tax-free growth that comes out on the back end.

You are going to pay income tax on that as the money comes to you if it's not used properly according to the IRS. You want to be really careful. And here's where having all of those old tax or those old receipts from prior medical expenses that are qualified.

Yeah, maybe you chose to pay out of pocket while you were working, but you kept all of those receipts. If you need money later, maybe you don't need it for medical expenses, but you can take money out of the HSA and justify that through the receipts that you saved from many, many years ago.

I won't say it's gaming the system that you're playing within the rules that the IRS is established and using it to your advantage. Lots of cool opportunities here, but what I would hate to see is that you cut off your nose despite your face, right?

You don't even think about that you're severing one of the cool tax advantages of the HSA by using the money inappropriately according to the IRS.

What Happens to HSA Funds When I Die?

We're really going to shift gears and talk about what happens to your HSA when you die. If you have your spouse named as the beneficiary on this account, they are simply going to become the new owner of the HSA.

They're going to maintain those same tax advantage opportunities and status just like you had for all the qualified medical expenses for their entire lifetime. Just like you would have had the opportunity to do so, your spouse is going to inherit that opportunity to do so. But once the spouse dies, whomever they name as the next beneficiary will receive the money.

This next slide that I'm going to talk about would be if there is a non-spouse named as the beneficiary, either the immediate beneficiary when you die or the subsequent beneficiary after your spouse dies, your spouse gets to make that decision who they're going to name.

In the event that someone like this, a non-spouse is receiving this money, the account immediately becomes no longer classified as an HSA. They're going to look at the fair market value of the account and it is going to become taxable to the beneficiary in the year in which you die.

This certainly could create a tax issue for a non-spouse beneficiary. Let's say one of your children is named as a beneficiary. That seems like a logical thing, right? You die, you leave it to your spouse, your spouse names your children as the beneficiary, and there's $300,000 in that account when your spouse dies.

Your children or child are going to receive all of that money in one single tax year, which likely puts them into a different tax bracket.

And that's why we want to make sure that all of those receipts were kept over all of those years that you had the HSA account so that your family can get the money out of the HSA under the purview of all those qualified medical expenses that were allowed by the IRS and get the money out because you hadn't claimed that money yet.

So keep all of those receipts, even if you plan to be the saver or investor and not use the money right now, keep those and find someplace that you are going to consistently keep those receipts over the next many, many years as you have the HSA open so that your family can find it. Maybe that's a special drawer in your office.

Maybe that's a file on your computer. You want to make sure people have access to wherever you're keeping those receipts, but what a tremendous financial opportunity you have to be able to provide a little bit of relief to others who may inherit your account, whether it's your spouse or your children.

When we think about whether the high deductible health plan paired with an HSA compared to a traditional FEHB plan is right for you, you are the only one who's going to know whether you can stomach the structure of this high deductible health plan.

I think it's easy to look at the HSA and say, yeah, if I could get an account that I never, ever have to pay taxes on it, as long as I use it for health expenses, which we know is the highest expense that retirees pay for, sign me up.

The HSA is the easy part of this. It's also where all the opportunity is, right? The part that a lot of people have to wrestle with is this high deductible health plan and is it the right fit for them?

Can they get through some of the pain that may come along with a high deductible health plan in some of those years to make the HSA possible?

The “Right-Fit” Analysis

When we're thinking of the right fit for an HSA, this is all generally speaking, but it is typically more ideal for people who are willing to pay those medical expenses out of pocket along the way and allow that HSA to grow over a long period of time.

And we saw the difference in the final outcome, whether you save the money or you invest the money, and so you get to decide over that. But over that long period of time of being able to have money that is now coming to you tax-free is quite beautiful. It's maybe less ideal if the plan is to spend HSA money every year.

It's not that it's bad, but it's just maybe you don't get that big tax punch at the end when you have all of this money that is available to you tax-free. I

f you're not really focused on that long-term growth of the money because you're more of a spender and going to use that money along the way, you just don't have that big aha tax moment at the end to be able to look back and say, “Wow, all of that felt really worth it.”

Because the biggest value of the HSA is the time and the compounding. When you have an opportunity to have compound interest through an investment program where you have higher rates of return than just a normal savings account, which we saw was pretty much providing nothing, you now have a bigger opportunity to make that tax advantage even larger by virtue of how fast or how high that money grows to when it comes time to use it.

Wrap-Up & Next Steps

Here's the wrap up. There is no other account in the tax code that works exactly like this when it comes for medical expenses, or frankly, anything else. Forget medical expenses.

This is quite incredible. And if used correctly, the HSA is the only account where you may never, ever pay taxes at all. And if we can sign up for an account like that, that seems like a great deal.

And if the HSA was a standalone program, everyone would sign up for it. It's just that connection to the HDHP side of what you have to be willing to pay for now so that you can set yourself up for an amazing tax advantage later that you have to wrestle with.

Of course, just like every time that you make a change to your FEHB plan, you want to give really careful consideration to what your health situation really looks like.

And if you're someone who doesn't go to the doctor all that often, you're pretty darn healthy, who knows, stuff happens and we have to be prepared for that, but you have an opportunity to create now another chance for you to have a really amazing tax advantage later.

And I will say, I mean, as excited as I am about the opportunities within an HSA, it's not automatically better. It's a different trade-off. You have to be willing to see the bigger picture of what you're doing and be okay with the risks that you're taking now versus the reward that you can receive later.

And so it is a big balance, but one that I hope that today's webinar helped you to get through. You guys know health insurance is such a big part of the retirement story that you're going to have in that stage of your life.

And if you've been with us for a while, you know we do retirement workshops throughout the country. These are in person sessions, they're full day classes. There is no cost for you to attend. These are sponsored sessions.

The cost has already been paid, but this is open to any federal employee regardless of the agency that you're with.

And in that session, we're going to cover all the different federal benefits topics and the decisions that you're going to need to be making as you approach that retirement window.

You can see all of the details of the retirement workshops that we hold all over the country by going to fedimpact.com/attend.

I want to thank you all for joining us. I know that thinking about health insurance and all these healthcare costs and retirement is probably not the most exciting topic that you wanted to review today, but I appreciate that you all are forward thinkers.

You're thinking about the opportunities that you have in front of you and how to maximize that to the very best of your ability. And so I'm grateful that you are with us today.

As a reminder, you can find a workshop at fedimpact.com/attend. And to get in on that next webinar, you can go to fedimpact.com/webinar. We'll see you next time. Thank you so much.

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