Author: Tom O’Rourke, Counsel
Federal employees have access to a variety of benefit programs that offer financial security and enable them to minimize their income tax obligations.
The Thrift Savings Plan (TSP) allows individuals to save for retirement and provides a wide range of low-cost investment options. It also provides income tax savings. Participants in the Traditional TSP may make pre-tax contributions of up to $24,500 in 2026. This can reduce current income tax liability by approximately $5,400 per year. If an employee chooses to participate in the Roth TSP, contributions are made after-tax, but qualified withdrawals are tax-free. A qualified withdrawal is one taken at age 59 ½ or later and at least 5 years after the Roth TSP account has been started.
The Federal Employee Health Benefits (FEHB) program provides a variety of health insurance plans at competitive rates. Premiums under the FEHB are paid on a pre-tax basis by active Federal employees. Paying expenses on a pre-tax basis results in income tax savings. For example, if an individual’s annual insurance cost is $5,000, paying this cost on a pre-tax basis will reduce income tax liability by approximately $1,200 – $1,500 per year. The tax savings vary by tax bracket.
The Federal Flexible Spending Account (FSA) program allows active employees to set aside up to $3,400 pre-tax in 2026 to reimburse themselves for out-of-pocket medical costs like deductibles, co-pays, or expenses not covered by insurance. Participating in the FSA will result in income tax savings of approximately $1,000 per year. Once again, exact savings will depend on an individual’s tax bracket. It is important to note, however, that money set aside in the FSA is done on a “use it or lose it” basis. To the extent a person sets aside more than he/she needs to pay out of pocket medical expenses, any excess is forfeited. An individual is entitled to carry forward up to$680 (2026 carryover amount) for use in the following year.
The Federal Health Savings Account (HSA) program allows an employee to create an account into which tax deductible contributions of up to $9,750 may be made. A person who has self only insurance coverage may deduct up to $4,400 per year while a person with family coverage may deduct up to $8,750 per year. Additionally, individuals aged 55 or older may make a catch-up contribution of $1,000 per year. Money contributed to an HSA may be invested and any earnings grow tax free. Funds withdrawn from an HSA to reimburse the account owner for medical expenses are not subject to income tax. An individual must participate in a high-deductible health insurance plan to be eligible to make tax deductible contributions to an HSA. A plan is high-deductible if it is a self only plan and the deductible is at least $1,700, or if it is a family plan and the deductible is at least $3,400. Additionally, only employees who are actively working and under the age of 65 (not eligible for Medicare) can contribute to an HSA.
All of the benefits described in this article are available to active (not retired) employees and are available to all participants whether or not they itemize deductions. All of these programs help achieve a desirable financial objective and also help a participant reduce income tax liability.
Thomas O’Rourke is an attorney who began his legal career with the Internal Revenue Service where he served in the Office of Chief Counsel for a period of ten years. He was in private law practice from 1983 until his retirement in 2023. Mr. O’Rourke has been an NITP instructor for Tax and Estate Planning since 1989.
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