Health Care Flexible Spending Accounts Can Help Ease the Sting of Increasing Out-of-Pocket Medical Expenses

 

An important decision that federal employees must make during the current benefits open season is whether to enroll (if they are not currently enrolled during 2022) or to reenroll (if they are enrolled during 2022) in a health care flexible spending account (HCFSA) for plan year 2023.

With the surge in inflation over the past year, health care costs are increasing significantly. The Office of Personnel Management (OPM) announced that the average premium for a Federal Employees Health Benefits (FEHB) health plan will be 7.2 percent more in 2023 compared to what the premiums are during 2022. The highest increase of FEHB premiums from one year to the next year in 10 years.

In addition to rising FEHB health plan premium costs, out-of-pocket medical expense are rising significantly as well. Out-of-pocket expenses include deductibles, coinsurance, and copayments. From year-to-year it is not whether or not a federal employee enrolled in an FEHB health plan (or any other health plan they may be enrolled in such as a spouse’s health insurance plan) has out-of-pocket medical expenses. It is a matter of how much in out-of-pocket health care expenses and what is the least costly way to pay these expenses.

An HCFSA is one of the best ways to pay these out-of-pocket expenses. This column discusses why employees who have never enrolled in an HCFSA should consider enrolling in an HCFSA for 2023 and those employees who are currently enrolled in an HCFSA during should reenroll for 2023. Those employees who are currently enrolled in an HCFSA have to reenroll for 2023 as HCFSA participation in one year does not automatically carryover to the following year.

In order to participate in an HCFSA, it makes no difference what type of health insurance an employee is enrolled in. The employee can be enrolled in a fee-for-service plan, preferred provider organization plan, a point of service plan, health maintenance organization or a consumer driven health plan offered through the FEHB program. Or the employee could be enrolled in a group health plan such as TriCare or through a spouse’s employer-sponsored- group health plan that the spouse participates in.

An HCFSA allows an employee to be reimbursed for out-of-pocket medical, dental or vision expenses. Federal employees who work for an Executive Branch agency or an agency that has adopted the Federal Flexible Benefits Plan (“FedFlex”) can elect to participate in the federal flexible spendable account program called the FSAFEDS program (information about the program including how to enroll may be found at https://www.fsafeds.com).

Employees who enroll in a HCFSA will have a reduced federal and state liability as a result of contributing a portion of their gross salary to an HCFSA, thereby reducing their taxable salary. The HCFSA can be thought as a savings account that pays in a tax-preferential way for out-of-pocket medical, dental and vision expenses not covered by an FEHB program health plan, a Federal Employee Dental and Vision Insurance Program (FEDVIP) plan, or by another non-Federal health, dental or vision insurance plan.

The money contributed to an employee’s HCFSA is set aside before federal and state income taxes, and Social Security (FICA) and Medicare Part A (hospital insurance) payroll taxes. This results in an overall tax savings ranging from 20 to 50 percent. The average tax savings for an employee earning $50,000 who contribute $2,000 to an HCFSA is approximately $600. That means the employee gets $2,000 worth of health care purchasing power plus saving about $600 in overall taxes.

In terms of who can enroll in an FSAFEDS-sponsored HCFSA, only federal permanent full-time or part-time employees may enroll. Federal retirees cannot enroll in an HCFSA. Employees who are planning to leave federal service or to retire from federal service must use all of set aside HCFSA funds by the date they leave or retire from federal service.

The key is that an employee must be eligible to enroll in, though not necessarily enrolled, in the FEHB program in order to enroll in an HCFSA. The HCFSA reimburses an employee ‘s qualified health care expenses not covered by or reimbursed by a FEHB program health plan, by a FEDVIP dental or vision plan or any other health, dental or vision plan, including TriCare or a spouse’s private company-sponsored health insurance plan. Qualified health care expenses may be incurred by the employee, the employee’s spouse, and the eligible tax dependents, (including adult children) that the employee’s HCFSA will reimburse the employee.

During 2023, employees can contribute to an HCFSA a minimum $100 to a maximum $3,050 (an increase of $200 from the $2,850 maximum contribution for 2022). Spouses of employees who are also federal employees can also contribute a maximum $3,050 to their HCFSA during 2023. Each spouse can use their or the other spouse’s HCFSA to pay for or to reimburse qualified health care expenses incurred. The same is true for a spouse who is not a federal employee but works for a private company that has set up its own HCFSA for its employees and the spouse participates in the private company HCFSA.

An employee who wants to enroll in an HCFSA for 2023 must do so between November 14,2022 and December 12,2022 by going to https://www.fsafeds.com/enrollment-openseason?start. The employee must decide how much he or she wants to set aside from his or her gross salary during 2023 to contribute to the HCFSA. Once the employee decides that amount and officially enrolls, the total amount that will go into the employee’s HCFSA will be subtracted from the employee’s gross salary and spread evenly over 26 pay dates during calendar year 2023.

The following example illustrates:

Example 1. Carl is a federal employee who is enrolled in the FEHB program. He decides to set aside the maximum $3,050 to his HCFSA during 2023. Starting with Carl’s first pay date in January 2023, Carl will have:

$3,050/26 pay dates equals $117.31 per pay date

set aside from his gross salary to be put in Carl’s HCFSA. Carl may use his HCFSA to pay for his or a family member’s out-of-pocket health care expenses incurred between January 1,2023 and December 31,2023.

Until the year 2015, HCFSA owners were subject to a “use-or-lose” rule in which they had to use up their HCFSA funds by December 31. If they did not use up all of their HCFSA funds, nothing would be carried over to the new plan year and the employee would therefore lose any remaining HCFSA funds.

But effective with the 2015 plan year, HCFSA owners are able to carry a maximum amount of unused HCFSA funds over to the next plan year. For 2022, the carryover amount to 2023 is $570 and for 2023 the carryover amount to 2024 will be $620. Note that if an employee decides not to participate in an HCFSA for 2023 but instead will be using carryover funds from 2022, he or she must still enroll for the HCFSA during the current open season.

The following example illustrates:

Example 2. Julie is currently enrolled in an HCFSA for 2022. She plans to retire from federal service on March 31, 2023. Retirees are not allowed to have an HCFSA. Julie therefore decides not to set aside any of her salary during the three months she will be an employee during 2023. She estimates that she will have a balance of $550 left in her HCFSA as of December 31,2022 that she intends to use before she retires on March 31,2023. Julie must still enroll in the HCFSA during the current open season in order to use the $550 remaining balance between January 1,2023 and March 31,2023.

Those employees who are enrolled in a High Deductible Health Plan (HDHP) associated with a Health Savings Account (HSA) are not eligible to also have an HCFSA. But those federal employees who are enrolled in an HDHP and contribute to their HSAs are eligible for a “limited expenses” health care flexible spending account (LEXHCFSA). A LEXHCFSA reimburses the owner for eligible out-of-pocket dental and vision expenses not covered by dental and vision insurance programs. The same maximum of $3,050 can be set aside during 2023 to the LEXHCFSA as the amount that can be set aside to the HCFSA.

Medical, dental and vision expenses eligible for reimbursement from an HCFSA or a LEXHCFSA are those expenses that would qualify for the medical and dental expense deductions on an individual’s federal income tax return (assuming the individual itemizes – files IRS Schedule A). The following are some of the medical, dental and vision expenses that can be reimbursed from an HCFSA or a LEXHCFSA:

For further information about the HCFSA and the LEXHCFSA, employees should go to www.FSAFEDS.com or call 1-877-372-3337; TTY Line 866-353-8058. FSAFEDS Benefits Counselors are available Monday through Friday from 9 a.m. until 9 p.m. Eastern Time.