How a Health Care FSA Can Ease Rising Out-of-Pocket Medical Costs in 2027

 

One of the important decisions that federal employees must make during the current Federal Benefits Open Season is whether to enroll (if they are not currently enrolled) or re-enroll (if they are currently enrolled) in a Health Care Flexible Spending Account (HCFSA) for plan year 2027. With the surge in inflation during the past year, health care costs have increased significantly. The U.S. Office of Personnel Management (OPM) announced that the overall average premium increase for Federal Employees Health Benefits (FEHB) Program health plans will be 9.3 percent in 2027.

In addition to rising FEHB Program health plan premium costs, out-of-pocket medical expenses are rising significantly as well. Out-of-pocket expenses include deductibles, coinsurance and copayments. From year to year, it is not a matter of how much an employee and their family incur when it comes to out-of-pocket health care expenses. It is a matter of what is the least costly and most tax-efficient way to pay these out-of-pocket 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 for 2027, and why employees who are currently enrolled in an HCFSA should re-enroll for 2027. Employees who are enrolled in an HCFSA during 2026 must re-enroll, because HCFSA participation in one year does not automatically carry over to the following year.

Who Can Enroll in an HCFSA

In order for a federal employee to participate in an HCFSA, it makes no difference which health insurance plan the employee is enrolled in. The employee can be enrolled in an FEHB Program fee-for-service health plan, preferred provider organization health plan, point-of-service health plan, health maintenance organization or consumer-driven health plan. Or the employee can be enrolled in another group health plan, such as TRICARE or a spouse’s employer-sponsored group health plan. There is no requirement that a federal employee be enrolled in the FEHB Program in order to contribute to or enroll in an HCFSA.

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 spending account program called FSAFEDS. The program website has information about the program, including how to enroll.

Which federal employees are eligible to enroll in the FSAFEDS-sponsored HCFSA? Only full-time or part-time permanent employees may enroll. Federal retirees are not eligible. Employees who are planning to leave federal service or retire must use up all of their HCFSA funds by the day they leave or retire.

The key requirement is that the employee must be eligible to enroll in the FEHB Program, though not necessarily enrolled. The HCFSA reimburses an employee’s qualified health care expenses that are not covered by, or reimbursed by, an FEHB Program health plan, a Federal Employee Dental and Vision Insurance Program (FEDVIP) plan or any other health, dental or vision plan, including TRICARE or a spouse’s private company-sponsored health insurance plan. The HCFSA will reimburse the employee for qualified health care expenses incurred by the employee, the employee’s spouse and eligible dependents, including adult children.

How an HCFSA Saves Money

Employees who enroll in the HCFSA for 2027 will have reduced federal and state (most states) income tax liabilities, because employees contribute a portion of their gross salary to an HCFSA. The HCFSA can be thought of 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 FEDVIP plan or 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 before Social Security (Federal Insurance Contributions Act, or FICA) and Medicare Part A (hospital insurance) payroll taxes. This results in overall tax savings ranging from 20 to 50 percent. The average tax savings for an employee earning $50,000 who contributes $2,000 to an HCFSA is approximately $600. That means the employee gets $2,000 worth of health care purchasing power while saving about $600 in overall taxes.

2027 Contribution Limits and Enrollment Dates

During 2027, employees can contribute a minimum of $100 and a maximum of $3,500 to their HCFSA, an increase of $100 from the $3,400 maximum for 2026. Spouses of employees who are also federal employees can also contribute a maximum of $3,500 to their HCFSA during 2027. Each spouse can use their own or the other spouse’s HCFSA to pay for or reimburse qualified health care expenses. 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, if the spouse participates in that plan.

Federal employees who want to enroll in the HCFSA for 2027 must do so between November 9, 2026, and December 14, 2026, by going to the FSAFEDS open season enrollment page. An employee must decide how much to have deducted from gross salary during 2027 for the HCFSA. Once the employee decides on that amount and officially enrolls, the total will be subtracted from gross salary and spread evenly over 26 pay dates during calendar year 2027, starting with the first pay date in January 2027. 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 $3,500 to his HCFSA during 2027. Starting with Carl’s first pay date in January 2027, Carl will have $3,500 divided by 26 pay dates, which equals a $134.62 deduction per pay date, set aside from his gross salary and 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, 2027, and December 31, 2027.

Carryover Rules

Until 2015, HCFSA owners were subject to a “use-or-lose” rule in which they had to use up their HCFSA funds every year by December 31. If they did not use all of their funds, nothing was carried over to the new plan year and the employee lost any remaining money. Starting with the 2015 plan year, HCFSA owners are able to carry over a maximum amount of unused funds to the next plan year. For 2023, the carryover amount to 2024 was $570. For 2024, the carryover amount to 2025 was $620. For 2025, the carryover amount to 2026 was $660. For 2026, the carryover amount to 2027 is $680.

Note that if an employee decides not to participate in an HCFSA for 2027 but instead will use carryover funds from 2026, the employee must still enroll in the HCFSA during the current open season. The following example illustrates:

Example 2. Julie is currently enrolled in an HCFSA for 2026. She plans to retire from federal service on March 31, 2027. 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 2027. She estimates that she will have a balance of $550 left in her HCFSA as of December 31, 2026, that she intends to use before she retires on March 31, 2027. Julie must still enroll in the HCFSA during the current open season in order to use the $550 remaining balance between January 1, 2027, and March 31, 2027.

HCFSA Rules for Health Savings Account Participants

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 federal employees who are enrolled in an HDHP and contribute to their HSAs are eligible for a Limited Expense 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 $3,500 that can be set aside to the HCFSA can be set aside during 2027 to the LEXHCFSA.

Eligible Expenses

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

A complete list of the eligible medical, dental and vision expenses that qualify for reimbursement from the federal HCFSA is available on the FSAFEDS eligible expenses page.

For further information about the HCFSA and the LEXHCFSA, employees can go to the FSAFEDS contact page or call 1-877-372-3337 (TTY: 866-353-8058). FSAFEDS Benefits Counselors are available Monday through Friday from 9 a.m. until 9 p.m. Eastern Time.