An important decision that federal employees must make during the benefits open season is whether to enroll or to reenroll (if they are enrolled during 2025) in a health care flexible spending account (HCFSA) for the next year. With the recent surge in inflation, 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 10.2 percent more in 2026 compared to what they are in 2025.
SEE: 2026 FEHB Premiums
In addition to rising FEHB 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 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 out-of-pocket health care expenses are and what is the least costly and most effective way to pay these expenses.
An HCFSA is one of the most tax-efficient ways to pay out-of-pocket medical, dental and vision expenses. This column discusses why employees who have never enrolled in HCFSA should consider enrolling for the 2026 plan (calendar) year. Those employees who are currently enrolled should reenroll for 2026. This is because employees who are currently enrolled have to reenroll for the next plan year 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 FEHB program health insurance plan an employee is enrolled in. The employee can be enrolled in a fee-for-service plan, a preferred provider organization plan, a point of service plan, a health maintenance organization or a consumer driven health plan offered through the FEHB program. Or the employee could be enrolled in another group health insurance plan (such as TriCare) or through a spouse’s employer-sponsored- group health plan.
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 FSAFEDS program (information about the program including how to enroll may be found at https://www.fsafeds.com).
Employees who enroll in an HCFSA will have reduced federal and state liabilities as a result of contributing a portion of their gross salary to the HCFSA, thereby reducing their taxable salary. The HCFSA can be thought as a savings account that reimburses 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 any 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 can result 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 plus saving about $600 in overall taxes
Only permanent full-time or part-time federal employees may enroll in an HCFSA. By IRS rules, federal retirees are not permitted to enroll in an HCFSA. Employees who are planning to leave federal service or to retire from federal service must use all of the HCFSA funds by the date they leave or retire from federal service.
The key requirement for a federal employee to enroll in an HCFSA is that an employee must be eligible to enroll in (though not necessarily enrolled) in the FEHB program. The HCFSA reimburses an employee ‘s qualified health care out-of-pocket expenses not covered by a FEHB program health plan or other health plan including TriCare, not by a FEDVIP dental or vision plan or any other health, dental or vision insurance plan. Qualified health care expenses may be incurred by the employee, the employee’s spouse, and eligible tax dependents (including adult children).
SEE: Federal Employees Should Review Dental & Vision Coverage This Open Season
FSA Contributions for 2026
During 2026, employees can contribute to an HCFSA a minimum $100 to a maximum $3,400 (an increase of $100 from the $3,300 maximum contribution for 2025). Spouses of employees who are also federal employees can also contribute a maximum $3,400 to their HCFSA during 2026. 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 or to reenroll in an HCFSA for plan year 2026 must do so between November 10,2025 and December 8,2025 by going here. The employee must decide how much to set aside from his or her gross salary during 2026 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 2026. 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 $3,400 to his HCFSA during plan year 2026. Starting with Carl’s first pay date in January 2026, Carl will have:
$3,400/26 pay dates equals $130.77 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 1,2026 and December 31, 2026.
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 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 2025, the carryover amount to 2026 is $660. For 2026, the carryover amount to 2027 is $680. Note that if an employee decides not to participate in an HCFSA during 2026 but instead will be using carryover funds from 2025, 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 during 2025. She plans to retire from federal service on March 31, 2026. Retirees are not allowed to have an HCFSA. Julie decides not to set aside any of her salary during the three months she will be an employee during 2026. She estimates that she will have a balance of $550 left in her HCFSA as of December 31,2025 that she intends to use before she retires on March 31,2026. Julie must still enroll in the HCFSA during the current open season in order to use the $550 remaining balance in her HCFSA between January 1,2026 and March 31,2026.
Those federal employees who are enrolled in a High-Deductible Health Plan (HDHP) associated with a Health Savings Account (HSA) are not eligible to have an HCFSA. But those federal employees who are enrolled in an HDHP and contribute to their HSAs are eligible to contribute to a “limited expenses” health care flexible spending account (LEXHCFSA). A LEXHCFSA reimburses the owner for eligible out-of-pocket dental and vision expenses. The same maximum of $3,400 can be set aside during 2026 to the LEXHCFSA that can be set aside to an HCFSA.
Medical, dental and vision expenses eligible for reimbursement from an HCFSA or an 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). 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 call:
