Many employers pair their high-deductible health plans (HDHPs) with a health savings accounts (HSAs). HDHPs provide comprehensive coverage with lower premiums and higher cost sharing, while HSAs help employees manage out-of-pocket costs.
Through a Section 125 cafeteria plan, employees can make pre-tax HSA contributions, and contributions, earnings, and qualified distributions are generally exempt from federal income tax, FICA, and most state income taxes. Because of these advantages, HSAs are subject to strict federal rules. Employers should regularly review HDHP/HSA compliance and monitor legislative changes, such as rules for pre-deductible telehealth, to avoid costly errors and protect employee relations.
1. Ensure Health Plan Qualifies as an HDHP
To qualify for HSA contributions, employees must be enrolled in a compliant high-deductible health plan (HDHP) and have no other disqualifying coverage. For plan years beginning on or after January 1, 2026, HDHPs must have at least a $1,700 deductible for self-only coverage and $3,400 for family coverage, with out-of-pocket maximums no higher than $8,500 self-only and $17,000 family.
Before each plan year, employers should review their HDHP design to confirm it meets these limits and that any embedded family deductible is at least $3,400. They should also ensure that the plan does not pay benefits before the deductible is met, except for allowable preventive care and telehealth, no first-dollar coverage for items like generic drugs or diagnostic tests unless they qualify as preventive.
2. Understand How Health FSAs and HRAs Limit HSA Eligibility
When employers let employees make pre-tax HSA contributions, they must reasonably believe those contributions are tax-eligible. The employees are ultimately responsible for their own HSA eligibility.
Employees generally cannot contribute to an HSA if they’re covered by a general-purpose health FSA or HRA, including through a spouse. Grace periods and carryovers can also disqualify them, even if only a small balance remains.
If employees are moving from an FSA to an HSA, employers should review these rules in advance and consider strategies like allowing employees to waive FSA carryovers or offering an HSA-compatible (limited-purpose or post-deductible) FSA to help preserve HSA eligibility.
3. Help Employees Stay Within IRS Contribution Limits
Employees are responsible for staying within the IRS HSA contribution limits each year, $4,400 for self-only HDHP coverage and $8,750 for family coverage in 2026, with additional special rules for those 55+, midyear enrollees, and married couples sharing family coverage.
If contributions exceed the limit, the excess is taxable and generally subject to a 6% excise tax each year until corrected. To help employees avoid these penalties, employers should review their enrollment and payroll processes, provide clear HSA education, and remind employees to update their HSA elections when their coverage changes (for example, moving from family to self-only coverage).
4. Review HSA Contribution Rules with Employees Approaching Medicare Eligibility
Employees must stop HSA contributions once Medicare coverage begins. Because Medicare can start automatically at age 65 or apply retroactively for up to six months, it’s easy to accidentally exceed IRS limits.
To help employees avoid excess contributions and potential tax penalties, employers should make sure those approaching age 65 understand how Medicare enrollment, especially delayed or retroactive enrollment, will affect their HSA eligibility and when they should stop contributing.
5. Review HSA Contribution Rules With Employees Approaching Medicare Eligibility
Employees must stop HSA contributions once Medicare coverage begins. Because Medicare can start automatically at age 65 or apply retroactively for up to six months, it’s easy to accidentally exceed IRS limits.
To help employees avoid excess contributions and potential tax penalties, employers should make sure those approaching age 65 understand how Medicare enrollment, especially delayed or retroactive enrollment, will affect their HSA eligibility and when they should stop contributing.
Links and Resources
- IRS Publication 969, Health Savings Accounts and Other Tax-favored Health Plans
- IRS Notice 2004-50 on employer eligibility verification
- IRS Notice 2026-5 on pre-deductible coverage of telehealth and other remote care services for HDHPs
