Eligible individuals can accumulate money, tax-free, in HSAs to pay for qualified medical expenses. You or the individual can provide funds that are placed in an individually owned account, normally provided by a bank or insurance company. After the account is established and funded, earnings accrue on a tax-free basis and are portable without penalty if employment changes.1

The following is an introduction to health savings accounts. Further information is available on the Internal Revenue Service website and in the IRS Publication 969.

This topic contains the following information:

• Eligibility for HSAs
• High-Deductible Health Plans
• HSAs and Other Permitted Insurance
• Qualified Medical Expenses
• HSA Contributions and Tax Benefits
• Employer Participations in HSAs
• Flexible Spending Accounts

Eligibility for HSAs

HSAs are available to individuals who:

• Are covered by a high-deductible health plan
• Are not covered by another health plan
• Are not entitled to Medicare benefits
• Cannot be claimed as a dependent on another individual’s tax return

Any person, including one who is self-employed or a partner in a business, is eligible to contribute to an HSA. If an individual is eligible to participate on the first day of the last month of the tax year, the individual is eligible for the entire year.

High-Deductible Health Plans

A High-Deductible Health Plan (HDHP) is a plan that has:

• A higher annual deductible than a typical health plan; and
• A maximum limit on the annual deductible and out of pocket expenses.2

• For 2026, the minimum annual deductible must be at least $1,700 per individual coverage and $3,400 for family coverage. The plan must have a limit on out-of-pocket expenses and the limits are indexed and may change annually based on increases in the cost of living.

The out-of-pocket maximum is $8,500 for self-only coverage and $17,000 for family coverage.

The deductible must apply to all benefits under the plan with the exception of preventive care, which includes:

• Periodic health evaluations, including tests and diagnostic procedures ordered in connection with routine examinations, such as annual physicals.
• Routine prenatal and well-child care.
• Child and adult immunizations.
• Tobacco cessation programs.
• Obesity weight-loss programs.
• Screening services.3

A high-deductible health plan may provide preventive care benefits without a deductible or with a deductible below the minimum annual deductible.

These plans can be insured or self-insured by an employer or other organization. If the plan offers both in-network and out-of-network services, the dollar amounts used to determine high-deductible status exclude those applicable to out-of-network services. This may create higher maximum out-of-pocket limits for out-of-network services.

HSAs and Other Permitted Insurance

An individual can remain eligible for an HSA while maintaining certain other permitted insurance, including:

• Insurance coverage for a specific illness, such as cancer
• Hospital insurance that provides a per diem payment while hospitalized
• Workers’ compensation, property or public liability coverage
• Employee Assistance Plans not providing significant medical care benefits
• Accident and disability insurance
• Dental, vision and long-term care

Qualified Medical Expenses

Qualified medical expenses (QME) that can be paid from the HSA funds include amounts for medical or long-term care for the HSA owner and their spouse or dependents. Records must be maintained showing distributions were made for qualified expenses. Medical insurance premiums are not QME unless they are COBRA premiums, health insurance premiums paid while receiving unemployment benefits, premiums for long-term care insurance or premiums paid while an individual is eligible for Medicare (except for Medigap policies).

HSA Contributions and Tax Benefits

Tax-favored contributions to an individual’s HSA can be made by the individual or by you on behalf of the individual with tax dollars. The amount an employee, or any other person, can contribute to an employee’s HSA depends on the type of high-deductible health plan coverage the employer offers, the employee’s age, the date the employee becomes eligible and the date the employee ceases to be eligible. Visit the IRS website for the current amounts.

• For 2026, if you have self-only HDHP coverage, you can contribute up to $4,400. If you have family HDHP coverage you can contribute up to $8,750.

Contributions must be made in cash no later than the date of the individual’s tax return. Individual contribution limits are reduced by amounts that you contribute to the HSA and by any contributions the individual makes to an Archer medical savings account (MSA).

An individual can contribute to an HSA even if they have no income or income less than the amount contributed. An individual’s contributions are deductible from gross income and represent tax savings even if the taxpayer does not itemize. Excess contributions are subject to a six percent penalty for each year they remain in the account, but the penalty can be avoided by taking a distribution of the excess prior to the due date of the owner’s tax return.

• For married couples, the maximum family deductible is allocated equally between spouses, unless they agree to allocate differently. If both spouses are covered by separate high-deductible plans, the maximum contribution is based on the plan with the smallest deductible amount. If one spouse is providing family coverage under a high-deductible plan, both are treated as covered for tax purposes.

Eligible individuals over the age of 55 can make catch-up contributions. The catch-up contribution limit for 2025 remains at $1,000.

Earnings on funds held in an HSA are not taxable, nor are distributions made to pay qualified medical expenses.

If an HSA distribution is made for nonqualified purposes, it is taxable and subject to a 10 percent penalty. A distribution made upon the death of the owner, or upon the owner’s disability or eligibility for Medicare, is not subject to penalty. Funds can be rolled over from one HSA account to another once every 12 months and are nontaxable if the roll over is completed within 60 days. Upon the death of an HSA owner, the account can be transferred tax-free to a surviving spouse. Transfers to a non-spouse beneficiary are taxable to the beneficiary. Transfers to an estate are taxable to the owner in the year of death. In a divorce situation, funds transferred between HSAs are nontaxable.

Employer Participation in HSAs

Employers who choose to contribute to employee HSAs must make comparable contributions for all employees who participate in the employer’s high-deductible health plan. The contributions must be in the same dollar amount or in the same percentage of the annual deductible in the applicable health plan. Penalties apply if the comparability rule is violated. You can also offer an HSA option by salary deduction under a cafeteria plan. Contributions must be reported on the employee Form W-2.

An HSA will not be considered a health plan under ERISA if establishing the HSA is voluntarily undertaken by the employee and you do not:

• Impose portability limitations or impose usage conditions other than those provided by law.
• Influence or limit the investment options.
• Establish or maintain the HSA as the company’s plan.
• Receive any form of compensation in connection with the HSA.

You can limit wage deductions to a single provider or limit the number of providers that can market their products to employees through organization channels. If the HSA is not an ERISA plan, it is not covered by COBRA or HIPAA, nor does it require ERISA-specified plan documents or summary plan descriptions.

Flexible Spending Accounts

Some employers offer Flexible Spending Accounts, also called flexible spending arrangements (FSA), for employees to use when paying for certain out-of-pocket medical expenses. While FSAs also are tax-favored plans similar to HSAs, there are some differences between the two, including eligibility, reporting and contributions. Further information is available on the Internal Revenue Service website and in the IRS Publication 969.

California law requires employers using FSAs to notify participating employees of any deadline to withdraw funds before the plan year’s end in two different ways, which may include email, telephone, text message, postal mail and in-person notification.

1. 26 U.S.C. 223