High deductible health plans (HDHPs), paired with health savings accounts (HSAs), are a popular benefit strategy for all types of employers. HDHPs offer comprehensive health coverage with lower premiums and higher cost-sharing limits, while HSAs help employees manage their out-of-pocket expenses.
Employers that offer HDHPs typically allow employees to make pre-tax contributions to their HSAs through a Section 125 cafeteria plan. HSA contributions, earnings and amounts distributed for qualified medical expenses are all exempt from federal income tax, FICA tax and most state income taxes. Due to these tax savings, federal law imposes strict requirements on HSAs.
Employers offering HDHPs/HSAs should periodically review their compliance with these federal rules to avoid mistakes. Mistakes can be detrimental to employee relations and result in costly excise taxes for HSA owners. Employers should also monitor legislative and regulatory developments that can impact the design and administration of HDHPs/HSAs, such as the permanent extension of pre-deductible telehealth services for HDHPs.
This article outlines steps employers can take to help avoid common HDHP/HSA mistakes.
1. Ensure Health Plan Qualifies as an HDHP
To be eligible for HSA contributions, an employee must be covered under an HDHP and have no other impermissible health coverage. An HDHP is a health plan that provides significant benefits and satisfies requirements for minimum deductibles and out-of-pocket maximums. Also, no benefits can be paid by an HDHP until the minimum annual deductible has been satisfied for the year, with limited exceptions for certain types of benefits (i.e., preventive care and telehealth benefits).
The cost-sharing limits for HDHPs for plan years beginning on or after Jan. 1, 2026, are as follows:
- Minimum deductible: $1,700 for self-only coverage and $3,400 for family coverage; and
- Out-of-pocket maximum: $8,500 for self-only coverage and $17,000 for family coverage.
These cost-sharing limits are adjusted each year for increases in the cost of living. For HDHPs that do not operate on a calendar year basis, IRS Notice 2004-50 clarifies that the adjusted limits for the calendar year in which the HDHP’s plan year begins can be applied for that entire plan year.
Before the start of each plan year, employers with HDHPs should carefully review their health plan’s design to ensure it will satisfy the adjusted cost-sharing limits for the upcoming year. Employers should pay close attention to any embedded cost-sharing limits in their health coverage, particularly embedded deductibles in family coverage. An HDHP may include an embedded deductible for family coverage as long as the embedded deductible is not lower than the required minimum annual deductible for family coverage ($3,400 for plan years beginning in 2026).
Also, employers should periodically review their HDHP design to confirm that no benefits are paid until the annual deductible has been met, with the limited exceptions for preventive care and telehealth benefits. For example, this means the health plan cannot cover generic prescription drugs and diagnostic tests on a first-dollar basis, unless they qualify as preventive care.
2. Understand How Health FSAs & HRAs Limit HSA Eligibility
When an employer allows an employee to make pre-tax contributions to their HSA, the employer should have a reasonable belief that the contribution will be excluded from the employee’s income. However, the employee—not the employer—is primarily responsible for determining eligibility for HSA contributions. IRS Notice 2004-50 states that an employer is only responsible for determining whether the employee is covered under an HDHP or any low-deductible health plan sponsored by the employer, including health flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs).
Individuals who are covered by general-purpose health FSAs or HRAs are not eligible for HSA contributions. It does not matter whether an individual is covered by a general-purpose health FSA or HRA as an employee or as a dependent whose medical expenses can be reimbursed—both types of individuals are ineligible for HSA contributions.
In addition, an individual’s HSA eligibility may be affected when a health FSA incorporates a grace period or a carryover feature, as follows:
- Grace Period: Coverage by a general-purpose health FSA with a grace period will disqualify an employee from contributing to an HSA during the FSA’s grace period, unless the employee had a zero balance in the FSA at the end of the plan year; and
- Carryover Feature: An individual who has coverage under a general-purpose FSA solely as a result of a carryover of unused amounts from the prior year is not eligible for HSA contributions for the current year. The IRS has provided two alternative approaches that allow health FSA carryovers while preserving HSA eligibility. These approaches include:
- Carrying over unused amounts to an HSA-compatible health FSA (that is, a limited-purpose FSA or a post-deductible FSA); and
- Allowing individuals participating in a general-purpose FSA to decline or waive the carryover.
Before allowing employees to make pre-tax HSA contributions, employers should review these eligibility rules, especially if employees are moving from a health FSA with a grace period or carryover feature to an HSA for an upcoming plan year. As explained above, even a small health FSA carryover can disqualify an employee from HSA eligibility for the next entire plan year. However, employers can plan ahead and take steps to minimize the impact of these eligibility restrictions, such as allowing employees to waive carryovers or implementing an HSA-compatible health FSA.
3. Help Employees Stay Within IRS Contribution Limits
Employees are primarily responsible for determining how much they can contribute to their HSAs for each calendar year. For each month an individual is HSA-eligible, they may contribute one-twelfth of the applicable maximum contribution limit for the year. The applicable maximum contribution limit depends on whether the individual has self-only HDHP coverage or family HDHP coverage on the first day of the month. For 2026, the HSA contribution limits are $4,400 for individuals with self-only HDHP coverage and $8,750 for individuals with family HDHP coverage. The IRS adjusts these limits each year for inflation.
There are some special contribution rules for individuals who are age 55 or older, midyear HDHP enrollees and married spouses with family HDHP coverage that can impact how much can be contributed to an individual’s HSA. For example, if an employee is married and either spouse has family HDHP coverage, the HSA contribution limit for family coverage operates as a joint limit equally divided between the spouses (unless they decide on a different division).
Pre-tax HSA contributions that exceed an employee’s maximum contribution amount are considered “excess contributions” that are includible in the employee’s income for tax purposes. A 6% excise tax is also imposed on all excess contributions; however, the excise tax can be avoided if the excess contributions for a taxable year are distributed to the employee by April 15 of the following year. The 6% excise tax is cumulative and will continue in future years if a corrective distribution is not made.
To prevent these adverse tax consequences for employees, employers should review their benefit election processes and work with their payroll providers to help keep pre-tax HSA contributions within IRS limits as much as possible. Employers should also help employees understand the limits that may apply to their situation by providing educational resources on HSAs. If an employer is aware of a change in an employee’s situation during the year that could impact their HSA contribution limit (for example, the employee switches from family coverage to self-only coverage), it should remind the employee that they may need to change their payroll deduction for HSA contributions to reflect the change.
4. Review HSA Contribution Rules With Employees Approaching Medicare Eligibility
An individual is not eligible for HSA contributions once their Medicare coverage begins. Although this rule seems straightforward, Medicare’s enrollment rules may make it challenging for employees reaching age 65 to stay within the IRS contribution limits for HSAs. For example, because Medicare coverage typically begins automatically for individuals who are age 65 and receive monthly retirement benefits from Social Security, some employees may overlook the impact of the automatic coverage on their HSA contributions.
Also, Medicare coverage generally begins when an individual turns age 65, provided the individual files an application for Medicare within six months of when the individual becomes age 65. If the individual files an application more than six months after turning age 65, Medicare coverage will be retroactive for six months. An individual’s annual HSA contribution limit is reduced for any months of Medicare coverage, including retroactive Medicare coverage. To avoid excess contributions, individuals may need to stop making HSA contributions before they apply for Medicare coverage.
To avoid excess contributions, employers who have employees approaching age 65 should inform them how these rules may impact their HSA contributions for the year.
5. Don’t Overlook Permanent Exception for Telehealth Services
The One Big Beautiful Bill Act (OBBBA), which was enacted in July 2025, permanently allows employers with HDHPs to provide benefits for telehealth and other remote care services before plan deductibles have been met without jeopardizing HSA eligibility. A pandemic-related relief measure temporarily allowed HDHPs to waive the deductible for telehealth services without impacting HSA eligibility; however, this bipartisan-supported relief expired at the end of the 2024 plan year. The OBBBA retroactively extended this relief, effective for plan years beginning after Jan. 1, 2025, and made it permanent.
Employers should consider incorporating a first-dollar telemedicine benefit into their HDHPs for various reasons, including to help control health care spending by minimizing the need for in-person visits. Also, by connecting remotely, telemedicine can reach patients in rural and underserved areas where there might not be an available doctor or hospital. This can translate into cost savings by helping patients who would not normally seek routine care or preventive services remain healthy. Moreover, by allowing employees to access care more conveniently and efficiently, telemedicine can reduce time away from work and increase productivity.
Employers with HDHPs should review their health plan’s coverage of telehealth services and assess whether changes should be made, considering the OBBBA’s permanent extension. Any changes to telehealth coverage should be communicated to plan participants.
Links & 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
This article is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice. ©2026 Zywave, Inc. All rights reserved.
