4.1 High-Deductible Health Plans & Health Savings Accounts

High-Deductible Health Plans & Health Savings Accounts

Quick Answer: An HSA is a tax-advantaged savings account paired with an HDHP that offers a rare "triple tax advantage" — pre-tax contributions, tax-free growth, and tax-free qualified medical withdrawals. For 2026, an eligible individual with self-only HDHP coverage may contribute up to $4,400, and a family HDHP allows up to $8,750, with a $1,000 catch-up at age 55+.

A High-Deductible Health Plan (HDHP) is a health plan whose minimum annual deductible and maximum out-of-pocket (OOP) limit are set each year by the IRS. For 2026, the HDHP minimum deductible is $1,700 for self-only coverage and $3,400 for family coverage. The 2026 HDHP maximum out-of-pocket limit is $8,500 for self-only and $17,000 for family coverage. To qualify as an HDHP, a plan must satisfy both the minimum deductible and the maximum OOP thresholds; a plan with embedded individual deductibles below the family minimum, or with OOP caps above the family maximum, is not HSA-qualified.

Preventive Care Exception

An HDHP may cover preventive care before the deductible is met without losing HDHP status (IRS Notice 2004-23 and later guidance). Preventive care includes annual physicals, immunizations, and routine screenings such as mammograms, colonoscopies, and blood-pressure checks. This exception is why HDHPs can still offer first-dollar preventive benefits while preserving HSA eligibility.

HSA Eligibility

A Health Savings Account (HSA) is an individually owned, tax-advantaged account used to pay for qualified medical expenses under IRC §213(d). To be HSA-eligible on the first day of a given month, an individual must:

1. Be covered under an HDHP.
2. Have no other first-dollar coverage — a general-purpose FSA or HRA that pays medical costs before the deductible disqualifies HSA contributions.
3. Not be enrolled in Medicare (Part A or any part of Medicare).
4. Not be claimed as a dependent on another taxpayer's return.

Standalone dental, vision, and limited-purpose FSAs do not disqualify HSA eligibility because they are not first-dollar medical coverage.

The Triple Tax Advantage

The HSA is the only account in the Internal Revenue Code with a genuine triple tax advantage:

• Pre-tax contributions — payroll contributions through a Section 125 cafeteria plan are excluded from gross income, and direct contributions are deductible above-the-line.
• Tax-free growth — earnings on HSA investments grow tax-free.
• Tax-free qualified withdrawals — distributions used for qualified medical expenses are tax-free.

Non-qualified withdrawals are included in income and, before age 65, subject to an additional 20% penalty tax. After age 65, non-medical withdrawals are still taxed as income but the 20% penalty no longer applies, making the HSA functionally similar to a traditional IRA for non-medical spending after 65.

2026 Contribution Limits

For 2026 (IRS Rev. Proc. 2025-19):

The catch-up is available in the year the account holder turns 55. For a married couple covered under a family HDHP, each spouse who is 55 or older may make a separate $1,000 catch-up, but each must have their own HSA — a single HSA cannot accept two catch-ups.

Rollover and Portability

Unlike an FSA, HSA balances roll over year to year — there is no use-it-or-lose-it rule. The account is owned by the individual, not the employer, so it is fully portable when the account holder changes jobs or leaves the workforce. An HSA can be funded by the employee, the employer, or both; employer HSA contributions are excluded from the employee's gross income. Direct rollovers from one HSA to another are tax-free if completed within 60 days and are limited to once per 12-month period per HSA, while unlimited trustee-to-trustee transfers are always tax-free.

Contribution Proration and the Last-Month Rule

HSA contributions are generally allowed pro-rata by the number of months the individual is eligible. Under the last-month rule, an individual who is HSA-eligible on the first day of the last month of the tax year (December 1) may contribute the full annual amount for that year. However, the individual must remain HSA-eligible through December 31 of the following year (the testing period). If the testing period is failed, the excess contribution is included in income and subject to the 20% penalty. This proration rule rewards full-year enrollment but penalizes mid-year loss of HDHP coverage.

Qualified Medical Expenses

HSA distributions are tax-free when used for qualified medical expenses under IRC §213(d) — doctor visits, hospital care, prescription drugs, dental and vision care, and the enrollee's cost-sharing (deductibles, copays, coinsurance). Premiums generally are not qualified expenses, with narrow exceptions such as COBRA continuation premiums, qualified long-term care insurance premiums up to the age-based limit, and premiums for health coverage while receiving unemployment compensation. Over-the-counter drugs are qualified with a prescription (insulin is qualified without one).

Employer HSA Contributions and Comparability

Employer HSA contributions are excluded from the employee's gross income and are not subject to FICA. An employer making HSA contributions must satisfy the comparability rule: contributions must be comparable for all employees with the same HDHP coverage category (same-tier employees receive the same amount or percentage). Alternatively, the employer may contribute through a Section 125 cafeteria plan, which permits varying contributions by family status, but then the comparability rule does not apply. Violating comparability triggers an excise tax.