Health Savings Account (HSA): What It Means for Employers

What it means in practice

What an HSA is. An HSA lets a person set aside money on a pre-tax basis for qualified medical expenses, and HealthCare.gov notes that the person may contribute only if enrolled in an HSA-eligible plan. The account is set up with a qualified trustee, and the IRS states in Publication 969 that it is "portable": it stays with the individual if they change employers or leave the work force. Contributions must be made in cash, and family members or any other person may contribute on behalf of an eligible individual.

Who is eligible. Publication 969 lists the tests for an eligible individual. The person must be covered by a high deductible health plan (HDHP) on the first day of the month, generally cannot have other health coverage, cannot be enrolled in Medicare, and cannot be claimed as a dependent on another person's tax return. A spouse may have non-HDHP coverage as long as the individual is not covered by that plan. The "other coverage" rule has exceptions: the IRS lists permitted additional insurance such as a specific disease or illness, fixed-amount hospitalization, accidents, disability, dental care, vision care, long-term care, and telehealth and other remote care. Under the Medicare rule, the contribution limit is zero beginning with the first month the individual is enrolled in Medicare, and retroactive Medicare coverage can turn earlier contributions into excess contributions.

What counts as an HDHP. For 2026, Rev. Proc. 2025-19 defines a high deductible health plan as one with an annual deductible not less than $1,700 for self-only coverage or $3,400 for family coverage, and with annual out-of-pocket expenses (deductibles, co-payments and other amounts, but not premiums) that do not exceed $8,500 for self-only coverage or $17,000 for family coverage. Publication 969 adds that an HDHP may cover preventive care without a deductible, or with a deductible below the minimum, and it lists items such as periodic health evaluations, routine prenatal and well-child care, immunizations and screenings. It also reports that, under Public Law 119-21 (July 4, 2025), a plan does not fail to be an HDHP for lacking a deductible for telehealth and other remote care services, for plan years beginning after 2024.

Contribution limits. For 2026, the IRS lists a contribution limit of $4,400 for self-only coverage and $8,750 for family coverage, plus $1,000 for those 55 or older. For comparison, Publication 969 (the edition for 2025 returns) shows $4,300 and $8,550 for 2025, so figures built into enrollment or payroll systems from last year are out of date. The 2025 edition says contributions for 2025 can be made through April 15, 2026. If both spouses are 55 or older and not enrolled in Medicare, each makes their own catch-up contribution to their own HSA, and the publication states a combined 2025 family cap of $10,550 ($8,550 plus two $1,000 catch-ups). Check the current publication for the 2026 combined figure. If either spouse has family HDHP coverage, both are treated as having family coverage, and there is no joint HSA: each eligible spouse must open a separate account.

The last-month rule and the testing period. A person who is an eligible individual on December 1 is generally treated as eligible for the whole year, so can contribute the full annual amount. The trade-off is the testing period, which runs from the last month of the tax year through the last day of the 12th month after it. Publication 969 states that if the individual fails to remain eligible during the testing period for reasons other than death or becoming disabled, the contributions the rule allowed are included in income and a 10% additional tax applies.

Employer contributions. Employers often offer an HSA alongside an HDHP and may contribute to employees' accounts, including through a cafeteria plan. Publication 969 says employer contributions are not included in the employee's income and reduce the amount the employee may contribute personally, and that this includes amounts contributed through salary reduction under a cafeteria plan. The employer deducts its contributions on its business income tax return for the year it makes them; if a contribution is allocated to the prior year, it is still deducted in the year it is made. Excess employer contributions are included in the employee's gross income. Amounts an employer contributes to employees' HSAs are not generally subject to employment taxes (FICA), and the employer reports them on Form W-2, box 12, code W, including amounts the employee elected to contribute through a cafeteria plan. This differs from a flexible spending account (FSA), which is tied to the employer plan rather than owned by the individual, and an employee with an HDHP and a general-purpose health FSA or HRA generally cannot make HSA contributions.

Comparability rules. Outside a cafeteria plan, an employer that decides to contribute must make comparable contributions to all comparable participating employees' HSAs. Publication 969 says contributions are comparable if they are the same amount, or the same percentage of the annual deductible limit under the HDHP covering the employees. Comparable participating employees are those who are covered by the employer's HDHP and eligible to establish an HSA, have the same category of coverage (self-only or family), and have the same category of employment (part time, full time, or former employees). The comparability rules do not apply to contributions made through a cafeteria plan. If contributions are not comparable, the employer must pay an excise tax of 35% of the amount contributed. The publication does not define part time by hours per week.

Employees who have not opened an account. The comparability rules reach eligible employees who have not established an HSA by December 31. According to Publication 969, the employer meets the notice requirement by giving written notice by January 15 of the following calendar year stating that eligible employees who establish an HSA and notify the employer by the last day of February will receive a comparable contribution for the prior year. The employer then meets the contribution requirement by contributing comparable amounts plus reasonable interest by April 15 of that following year (the 2025 edition gives April 15, 2026 for the prior year).

Worked example: employee contribution room. In 2026, an employee under 55 has self-only HDHP coverage and their employer contributes $1,000 to their HSA. Under the IRS rules, the employee can add up to $3,400 of their own, because the $4,400 limit is reduced by the excludable employer contribution. The employer contribution also reduces the wages that are gross income for tax purposes, which affects how the amount appears in payroll and, ultimately, net pay. A second illustration: an employee age 55 or older with family HDHP coverage has a 2026 limit of $9,750 ($8,750 plus the $1,000 catch-up); if the employer contributes $2,000, the employee can add up to $7,750. Both examples assume the individual is eligible for the whole year.

Worked example: comparable contributions. Suppose, for illustration only, that an employer contributes the same percentage of the HDHP deductible to every comparable employee, and sets it at 25%. An employee with a self-only plan carrying a $2,000 deductible would receive $500, and an employee in the same employment category with a family plan carrying a $4,000 deductible would receive $1,000. Under Publication 969 these can be comparable because each is the same percentage of the annual deductible limit under the HDHP covering the employee. The figures are hypothetical, not recommended contribution levels.

Distributions and the individual's side. Qualified medical expenses are amounts paid for "medical care" as defined in section 213(d) of the Code, for the account holder, a spouse, and all dependents claimed on the return, and they must not be reimbursed from another source. The IRS states that expenses incurred before the HSA is established are not qualified medical expenses. Publication 969 states that HSA funds generally may not pay for insurance premiums, with exceptions for long-term care insurance, health care continuation coverage such as COBRA, health coverage while receiving unemployment compensation, and Medicare coverage (but not Medigap premiums) for those 65 or older. Distributions not used for qualified medical expenses are included in income and carry an additional 20% tax, with no additional tax on distributions made after the individual becomes disabled, reaches age 65, or dies. The trustee reports distributions on Form 1099-SA and contributions on Form 5498-SA.

Form 8889. The Form 8889 instructions say the form is used to report HSA contributions, calculate the HSA deduction, report distributions, and calculate income and additional tax due if the individual fails to remain eligible. A person must file it, with Form 1040, 1040-SR or 1040-NR, if they, their employer or someone else contributed to their HSA, or if the HSA made a distribution (even with no taxable income). Employer contributions are entered on the form and should match Form W-2, box 12, code W, so accurate W-2 reporting by the employer matters to the employee's filing.

Excess contributions, rollovers and death. The IRS states that a 6% excise tax generally applies to excess contributions, figured on Form 5329. The tax can be avoided by withdrawing the excess, and the earnings on it, by the due date of the return including extensions. Rollovers must be completed within 60 days after receipt, and only one rollover contribution to an HSA is allowed in a 1-year period; a direct trustee-to-trustee transfer is not treated as a rollover and is not limited in number. If a spouse is the designated beneficiary, the account is treated as the spouse's HSA after the holder dies; otherwise it stops being an HSA and its value becomes taxable to the beneficiary.

Where states differ. Federal treatment does not automatically carry over to state income tax. As one example, the California Franchise Tax Board states in its Publication 1001 (2025) that California law does not conform to the federal HSA rules: interest and dividends earned in an HSA are taxable in the year earned, contributions made by an employer that are excluded from federal W-2 wages are not excluded for California, and filers are directed to adjust for the employer amount shown in W-2, box 12, code W. The same table says that, for distributions not used for qualified medical expenses, the amount taxable federally, less interest and dividends previously taxed by California, is not taxable by California. This is one example only; other states were not reviewed, so check your own state tax agency. This entry does not address state payroll tax treatment.

Recordkeeping. For employers, the key record is the amount of employer and cafeteria-plan HSA contributions reported on each employee's Form W-2 in box 12 with code W. For individuals, Publication 969 says records must show that distributions were exclusively to pay or reimburse qualified medical expenses, that the expenses had not been paid or reimbursed from another source, and that they were not claimed as an itemized deduction in any year; these are kept with tax records rather than sent with the return.

What this entry does not cover. The figures above are federal unless labelled otherwise. This entry does not cover plan design, which coverage to offer, or individual tax advice. Confirm specifics with the IRS or a qualified professional.

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