Health Savings Account

How an HSA works

An HSA is paired with a high-deductible health plan (HDHP). The plan has a higher deductible and lower premiums; the HSA gives the employee a tax-advantaged way to save for the costs they now pay before the deductible is met.

The tax treatment is unusually generous, which is why people call it a triple tax advantage:

1. Money goes in pre-tax. Through payroll, contributions avoid federal income tax and, when made through a Section 125 cafeteria plan, Social Security and Medicare tax too.
2. Growth is tax-free. Balances can be invested in funds once they pass a minimum cash balance set by the HSA provider.
3. Withdrawals for qualified medical expenses are tax-free, whenever they happen.

Unused money rolls over every year with no limit. Withdrawals for non-medical purposes are taxed as income, plus a 20% penalty before age 65; after 65 the penalty goes away, so the account behaves like a traditional IRA for non-medical spending. A few states, including California and New Jersey, do not follow the federal treatment and tax HSA contributions at the state level.

2026 HSA contribution limits and HDHP requirements

The IRS adjusts these figures every year. For 2026:

• Contribution limit, self-only HDHP coverage: $4,400
• Contribution limit, family HDHP coverage: $8,750
• Catch-up contribution, age 55 and over: an extra $1,000
• HDHP minimum annual deductible: $1,700 self-only, $3,400 family
• HDHP maximum out-of-pocket: $8,500 self-only, $17,000 family

The contribution limit covers employee and employer money combined. If the employer puts in $1,000 to a self-only account, the employee can add up to $3,400 more. Someone who is eligible for only part of the year generally gets a prorated limit, unless they use the last-month rule and stay eligible through a test period.

Who can open and contribute to an HSA

To contribute, a person must:

• Be covered by an HSA-qualified HDHP
• Have no other disqualifying health coverage, which includes a general-purpose health FSA (their own or a spouse's) and most non-HDHP plans
• Not be enrolled in Medicare
• Not be claimed as a dependent on someone else's tax return

The spouse's FSA trap catches people every year. If a married employee's spouse elects a general-purpose health FSA at another employer, the employee loses HSA eligibility even though they did nothing different. Ask about this in your enrollment materials.

Federal legislation passed in 2025 expanded eligibility starting in 2026, for example by treating bronze and catastrophic plans bought on the ACA Marketplace as HSA-compatible and allowing certain direct primary care arrangements. Check current IRS guidance for the details.

HSA vs FSA

• Ownership: the employee owns an HSA and takes it to the next job. A flexible spending account belongs to the employer's plan and generally ends when employment ends.
• Rollover: HSA balances roll over without limit. FSA money is mostly use-it-or-lose-it, with a limited carryover or grace period if the plan allows.
• Eligibility: an HSA requires HDHP coverage. A health FSA can sit beside any group health plan.
• Changing contributions: HSA payroll contributions can be changed any time. FSA elections are locked for the plan year unless there is a qualifying event.
• Investing: HSAs can be invested. FSAs cannot.
• Money available: HSA spending is limited to the current balance. A health FSA makes the full annual election available from the first day of the plan year.

An employee with an HSA can still use a limited-purpose FSA that covers only dental and vision costs, which is a common pairing. Some employers skip the HSA and fund a health reimbursement arrangement instead, which stays with the employer and follows different rules.

The employer's role

Employers are not required to offer an HSA, but most that offer an HDHP do. Your responsibilities typically include choosing an HSA custodian, setting up payroll deductions through a Section 125 plan, sending contributions promptly, and reporting contributions on the W-2 in box 12, code W.

Employer contributions are a strong recruiting and retention tool, and they soften the jump to a high deductible. A common pattern is a flat amount (say $500 self-only and $1,000 family) or a match. If you contribute outside a cafeteria plan, the IRS comparability rules require equal contributions to comparable employees. Seeding the account in the first paycheck of the year, rather than spreading it out, helps employees who hit medical costs in January. Announce the contribution amount during open enrollment so people can factor it into their plan choice.

An HSA is generally not an ERISA plan when employer involvement is limited, but rules depend on how it is set up.

Is an HDHP with an HSA right for hourly employees?

For higher-paid, healthy employees an HSA is often the best deal in the benefits package. For lower-wage hourly staff it can be a trap. A $17-an-hour warehouse associate with a $3,400 family deductible and no savings may avoid care rather than pay out of pocket. If the HDHP is the only option or the cheapest one, consider a meaningful employer HSA contribution, a lower-deductible alternative, or both. Watch claims and utilization by pay band after the first year to see whether people are delaying care.