In this second column of a two-part series, we’re diving into the ins and outs of Health Savings Accounts (HSAs), focusing on contributions and distributions. Federal employees and retirees can access HSAs through the Federal Employees Health Benefits (FEHB) program.
If you’re part of the FEHB program, you’ll find that the government covers a significant chunk of your health premiums, typically around 72 to 75 percent, leaving you with 25 to 28 percent to handle. Especially for those enrolled in high deductible health plans (HDHPs) linked with HSAs, a segment of the government’s premium contribution lands straight into your HSA.
This setup is often called the FEHB program HSA “premium pass-through.” For the coming year, 2024, Aetna and GEHA offer FEHB plans with specific HSA contributions outlined in the table that follows:
Let’s break it down: the maximum you can add to your HSA combines this automatic “premium pass-through” with what you voluntarily toss in. However, these combined contributions should not overshoot the IRS-set annual cap. For 2024, this cap stands at $4,150 for individual coverage and $8,300 for family or self plus one coverage. Moreover, folks aged 55 and above get a bonus—an additional $1,000 to their HSAs for both 2024 and 2025. The limits rise a bit for 2025, with $4,300 for individuals and $8,550 for those with family or self plus one coverages.
Now, let’s see this in action through a couple of examples:
Take Stuart, a 56-year-old single federal worker enrolled in Aetna’s HDHP for individual coverage in 2024. His monthly premium runs to $272.61, totalling $3,261 annually. From the available data, $66.67 of his monthly premium, or $800 annually, stem from contributions that head straight into Stuart’s HSA. This positions Stuart to add a maximum of $5,150 to his HSA (including the $4,150 standard limit and an extra $1,000 because he’s over 55). Thus, he can willingly contribute $4,350 more, post the $800 deduction. This voluntary contribution also slashes his taxable income for 2024 by the same amount. Being in a 22 percent tax bracket, Stuart would save $957 in federal taxes. He has until April 15, 2025, to make this contribution for the 2024 tax year.
Now, let’s check out Francine, a 48-year-old married federal employee with GEHA HDHP coverage for herself and her spouse in 2024. Her premiums sit at $372.78 monthly, or $4,473.36 annually. From this, $166.66 monthly, or $2,000 annually, is contributed to her HSA by her agency. Her total contribution cap for the year is $8,300, meaning she can add up to $6,300 more voluntarily. In her 24 percent tax bracket, Francine benefits from substantial tax savings of $1,512. Much like Stuart, she has till April 15, 2025, to contribute for the 2024 tax year.
Returning to Stuart’s case, he invested $3,700 in his HSA between January and July 2024 and earned $200 in interest. He also withdrew $1,000 for medical expenses. Stuart can still deduct the $4,350 voluntary contribution when filing his 2024 federal taxes, avoids taxation on the earned interest, and likewise, the $1,000 withdrawal remains untaxed.
When it comes to reporting HSA contributions, any deposit made by your agency doesn’t count towards your income. Only your voluntary inputs to the HSA go down as adjustments to income on IRS Form 1040 Schedule 1. Your HSA provider will provide IRS Form 5498-SA to summarize your contributions and the end-of-year balance. Your agency’s contribution will be shown on Form W-2, Box 12 under Code “W”.
A bit like IRAs, HSA owners also have until April 15 to make contributions for the previous year. Should you decide to contribute in the first few months of the following year, ensure to mark it for the prior year; otherwise, it’ll apply to the current year.
Something unique to mention—once in your lifetime, you could do a tax-free rollover from a traditional IRA to your HSA, known as a “qualified HSA funding distribution.” The rollover cap aligns with the annual contribution limit, including combined automatic deposits. Even though this rollover isn’t tax-deductible, it’s handy if liquid cash isn’t available for HSA contributions.
Beware of making excess contributions, as they’re not deductible. If caught early and withdrawn alongside earnings before the tax return deadline, no penalties apply. Otherwise, excess contributions could face a 6 percent penalty, computed using IRS Form 5329 with your 1040.
In the case of divorce, HSAs transferred to a spouse aren’t taxed, and the receiving spouse assumes ownership. If the HSA owner dies and a spouse is the beneficiary, the account transitions smoothly to them. However, if someone else is named as a beneficiary, the account ceases to be an HSA and becomes taxable for them.
Summing it all up, HSAs offer a beneficial tax strategy to handle medical expenses effectively for federal employees and retirees. This aspect grows increasingly crucial in the face of the Tax Cuts and Jobs Act of 2017, leading many towards standard deductions instead of itemizing. Even for those who itemize, only medical expenses over 7.5 percent of the adjusted gross income can be deducted. HSAs serve not just for current medical costs but as a future safety net, covering long-term care and Medicare premiums alike.
