By: Tom O’Rourke, Counsel
Published: November 2023
The annual health insurance Open Season offers Federal employees an opportunity to not only provide for their health coverage, but also to reduce their income tax liability. For 2023, the Open Season is from November 13 through December 11, 2023. During this period, Federal employees will be able to select their health insurance coverage for 2024. Regardless of the plan selected, it will also provide certain tax benefits.
The Federal Employee Health Benefits Program (FEHB) is structured so that all premiums are paid on a pre-tax basis. By paying premiums with pre-tax dollars, an employee will save as much as from $2,000 to $7,000 in state and Federal income taxes. The exact savings realized by any individual will depend on the cost of their insurance coverage and their state and Federal tax bracket.
The Federal Flexible Spending Account (FSA) program allows an employee to set aside as much as $3,200 in 2024 on a pre-tax basis. Any amount in the account may be used to reimburse the employee for expenses not covered by insurance, such as deductibles or copays. If the employee elects to set aside the full $3,200, they can save approximately $1,000 in income taxes. The precise savings will depend on the person’s tax bracket.
It is important to note that if an individual does not use the full amount set aside in the FSA, they will lose it. Any unused amount is not refunded to the employee. The employee may, however, carry over up to $640 from the account from 2024 to 2025.
The Federal Health Savings Account (HSA) is available to employees who are enrolled in a High Deductible Health Insurance Plan (HDHP). A plan is high deductible if the deductible in 2024 is at least $1,600 for a self only plan or $3,200 for a family plan.
If you are enrolled in an HDHP and establish an HSA in 2024, you will be allowed to make tax deductible contributions of as much as $4,150 if you are enrolled in a self only plan, or $8,300 if you are enrolled in a family plan. Persons who are 55 or older may contribute an additional $1,000. Contributions to an HSA will reduce your current tax liability by as much as $3,000 depending on the amount contributed and your tax bracket.
Once funds are contributed to an HSA, they grow tax free and may be withdrawn tax free to pay health related expenses. Any contributions that are not used may be carried over and used in a future year to pay health related expenses. Funds withdrawn to pay anything other than health related expenses are fully taxable and are also subject to a 20% penalty. Once an individual attains the age of 65, they may make a penalty free withdrawal from their HSA, but if the withdrawal is not used for health-related expenses, it is subject to income tax.
All of the tax benefits discussed in this article apply whether or not you itemize deductions; however, they are only available while you are an active Federal employee and may not be used by retirees. Moreover, a person who is Medicare eligible (age 65 or older) is not eligible to establish an HSA.
Your primary goal in selecting a plan during Open Season should be to provide you with a plan that best suits your needs at the most reasonable price. Regardless of the plan selected, it will help you reduce your income tax liability.
Tom O’Rourke began his legal career with the Internal Revenue Service, where he served in the Office of Chief Counsel for a period of 10 years and has been in private law practice since 1983. Mr. O’Rourke has been with NITP since 1989.
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