The New Health Savings Account [HSA], Why You Should Contribute When Eligible, and a Note to Employers

Under the One Big Beautiful Bill Act (OBBBA) and subsequent IRS guidance (such as Notice 2026-5), the rules around Health Savings Account (HSA) eligibility were expanded significantly.

Because most plans are now eligible, it is easier to inform you which plans make you ineligible to contribute to an HSA.

Health plan types that are not eligible to contribute to an HSA:

1. Traditional Non-HDHPs (Silver, Gold, and Platinum Plans)

While the OBBBA automatically grants HSA eligibility to Bronze and Catastrophic plans (even if they don't meet traditional High-Deductible Health Plan thresholds), it does not grant this blanket eligibility to:

• Silver, Gold, or Platinum ACA Plans: These plans are still entirely ineligible for HSA contributions unless they independently meet the strict standard statutory IRS requirements for a High-Deductible Health Plan (HDHP).

2. Standard Plans with Deductibles/Out-of-Pocket Limits Outside IRS Thresholds

For any plan that isn't an Exchange-recognized Bronze or Catastrophic plan, it must strictly adhere to standard HDHP figures. A plan is ineligible if its structural limits do not meet the standard 2026 thresholds:

• Too Low of a Deductible: If the annual deductible is less than $1,700 for self-only or $3,400 for family coverage.

• Too High of an Out-of-Pocket Maximum: If the maximum out-of-pocket limit exceeds $8,500 for self-only or $17,000 for family coverage.

3. Plans Offering "First-Dollar" Coverage (Non-Preventive Care)

Under the law, an individual becomes ineligible to contribute to an HSA if they are covered by any plan providing medical benefits before the deductible is met, with limited exceptions. Disqualifying plans include:

• Plans with Low Copays for Office Visits/Prescriptions: If a plan covers regular doctor visits or non-preventive prescription drugs for a flat copay before the deductible is satisfied, it is ineligible.

• In-Person Care Paired with Telehealth: While the OBBBA permanently allows telehealth/remote care to be covered pre-deductible, any in-person services, medical equipment, or prescription drugs provided in connection with that virtual visit cannot bypass the deductible. If a plan covers those physical items at zero-deductible, it disqualifies the user.

4. Direct Primary Care (DPC) Arrangements Exceeding Monthly Fee Caps

The OBBBA famously legalized the pairing of Direct Primary Care (DPC) with an HSA, but it implemented strict caps. An individual becomes ineligible to contribute to an HSA if they participate in a DPC arrangement where:

• The periodic fees exceed $150 per month for an individual.

• The periodic fees exceed $300 per month for a family.

• Note: If the fees exceed these caps, you can still use existing HSA funds to pay the fees, but you lose the right to make new contributions to the HSA.

5. Traditional Flexible Spending Accounts (FSAs) and Health Reimbursement Arrangements (HRAs)

General-purpose employer benefit accounts still count as "other disqualifying coverage":

General-Purpose FSAs/HRAs: If an individual or their spouse is enrolled in a traditional health FSA or HRA that pays for general medical expenses before the HDHP deductible is met, HSA eligibility is destroyed. Only "Limited-Purpose" (dental/vision) or "Post-Deductible" FSAs/HRAs are permitted. (Note: The OBBBA does allow Standalone Bronze/Catastrophic plans to be paired with ICHRAs or QSEHRAs without losing HSA eligibility). 

Why Individual Taxpayers Should Contribute When Eligible:

It is the most beneficial tax savings and tax deferral vehicle available. Every eligible person should contribute the full annual amount to a Health Savings Account BEFORE any other tax deferment vehicle, including the Roth IRA. This is true for Californians even though California is one of only two states (New Jersey) that does not recognize the HSA deduction.

An individual HSA contribution is deductible for federal income tax purposes, and for all state taxes except New Jersey and California. The individual employee can achieve the same federal income tax deduction plus avoid social security and Medicare tax based on the amount contributed when contributions are paid via an employer.

A Note to Employers:

For EMPLOYEE HSA contributions to be made via payroll pre-tax (avoiding federal income tax, social security and Medicare tax), the employer must have a Section 125 Cafeteria Plan in place. When an employee elects to contribute, the process works as follows:

·  Pre-Tax Deductions: The chosen amount is deducted from the employee's gross pay before any taxes are calculated. 

·  The "Double" Tax Shield: Unlike standard 401(k) pre-tax contributions—which only bypass Federal and State Income Taxes—HSA contributions made via payroll also bypass FICA taxes (7.65% for Social Security and Medicare).

·  Funding the Account: After the payroll run, the employer collects the total deducted funds and routes them electronically (usually via ACH or an integrated file upload) directly to the employees’ individual HSA custodians (e.g., HSA Bank, Fidelity, Optum).

For EMPLOYER HSA contributions to be made via payroll they are treated purely as a non-taxable benefit memo item rather than a wage deduction.

·  Tax Treatment: Employer contributions are completely exempt from Federal Income Tax, State Income Tax, FICA, and FUTA. They are a fully tax-deductible business expense for the company. 

·  In Payroll Processing: The payroll software tracks the employer contribution alongside the employee’s contribution. It does not reduce the employee's net pay. Instead, it adds a "company paid benefit" line item to the payroll file, ensuring the cash is bundled and sent to the HSA custodian at the same time as the employee's portion (if any)

·  Year-End Reporting: Both employee pre-tax deductions and employer contributions are combined at the end of the year and reported on Form W-2 Box 12, Code W. 

Best employer practices:

Approach A: Setting Up WITH Employer Contributions

If you want to incentivize employees by putting money into their accounts, you can structure it as a Flat Lump Sum (e.g., $500 in January), Per-Pay-Period Credits (e.g., $20 per check), or a Matching Program (similar to a 401k match).

• Step 1: Adopt a Written Section 125 Plan Document. To allow employees to contribute pre-tax, you must have a legal plan document explicitly stating that HSAs are an approved benefit. Without this, employee contributions have to be made post-tax.

• Step 2: Partner with a Single HSA Vendor. Select one master HSA custodian for the company. While employees technically own their HSAs and can transfer money later, trying to send payroll files to 15 different banks is an administrative nightmare.

• Step 3: Define the Comparability Rules. The IRS requires you to treat employees fairly. If you give $1,000 to one full-time employee with single coverage, you must give $1,000 to all full-time employees with single coverage. (Alternatively, you can pass Section 125 nondiscrimination testing if you vary contributions based on age or tier).

• Step 4: Sync Payroll & HSA Provider. Map your payroll system so that Employee Pre-Tax Deductions and Employer Match codes point to the exact file layout required by your HSA custodian.

Approach B: Setting Up WITHOUT Employer Contributions

If the company is not contributing, the setup is nearly identical but involves much less liability.

• Step 1: Maintain the Section 125 Plan. Even if you contribute $0, employees still need the Section 125 framework to get that crucial FICA tax exemption on their payroll deductions.

• Step 2: Offer a "Pass-Through" System. You can designate a preferred HSA custodian, set up the electronic feed, and let employees know they can opt-in to fund it entirely out of their own paychecks.

• Step 3: Keep Communication Clear. Since you are not seeding the accounts, remind employees that the funds belong entirely to them, and they can change their payroll deduction amounts at any point during the year (unlike FSAs, which are locked in during open enrollment).