HSA (Health Savings Account)
A health savings account (HSA) is an account the employee owns for medical expenses, funded by payroll deductions and often an employer contribution.
- LAW
- 26 U.S.C. §223
- RATE
- Generally tax-free when made through a cafeteria plan
- CAP
- $4,400 self-only in 2026; $8,750 family
- WATCH FOR
- Unequal contributions outside a cafeteria plan: 35% excise
An outside custodian holds the account, not payroll. Contributions need an eligible employee: one covered by a high-deductible health plan (HDHP) with no disqualifying coverage. You withhold the employee’s election each pay run, add any employer contribution, and send both to the custodian. The annual limit counts both together. Unused money generally carries over from year to year and stays with the employee after they change jobs.
Who can contribute to an HSA?
Eligibility generally runs month by month. The employee must be covered by an HDHP on the first day of the month. The employee must also have no other health coverage, apart from coverage the law permits. Enrolling in Medicare ends eligibility, and so does being claimable as someone else’s dependent. Under the last-month rule, an employee eligible on December 1 can count as eligible all year, subject to a testing period.
What are the 2026 limits?
The limit covers everything contributed for the year, yours and the employee’s together. An employee age 55 or older at year-end can add $1,000 a year. From the first month of Medicare entitlement, the limit drops to zero. Excess contributions generally carry a 6% excise tax. The limits are indexed, so confirm each year’s figures with the IRS.
| COVERAGE | CONTRIBUTION LIMIT | HDHP MINIMUM DEDUCTIBLE | HDHP OUT-OF-POCKET MAXIMUM |
|---|---|---|---|
| Self-only (2026) | $4,400 | $1,700 | $8,500 |
| Family (2026) | $8,750 | $3,400 | $17,000 |
How does payroll carry an HSA election?
Salary reductions through a cafeteria plan count as employer contributions, and they are generally not subject to employment taxes. Keep employee and employer amounts as two numbers through the whole chain, since reporting and limit tracking need them separately.
- 01
Set up the election. Record the employee amount, your contribution rule, and whether the deduction runs through a cafeteria plan.
- 02
Withhold and contribute each pay run, tracking both amounts against the annual limit year to date.
- 03
Send both amounts to the custodian that holds the employee’s account.
- 04
Reconcile against the custodian. A deduction alone does not prove the money arrived, so compare totals with what the custodian accepted.
- 05
Report on Form W-2, box 12, code W, including amounts the employee elected through a cafeteria plan.
Frequently asked
- Publication 969 (2025), Health Savings Accounts and Other Tax-Favored Health Plans
- 26 U.S. Code § 223 - Health savings accounts
- Rev. Proc. 2025-19
General information, not legal or tax advice. Apply current federal and state rules with qualified guidance.