A health savings account (HSA) is a savings account that belongs to the employee and pays for medical costs with money that is never taxed: it goes in before tax, grows tax-free and comes out tax-free for qualified medical expenses. The catch is eligibility. You can only put money into an HSA while you are covered by an HSA-qualified high-deductible health plan (HDHP) and have no other disqualifying coverage.
Key takeaways
- Triple tax advantage. Pre-tax contributions, tax-free growth and tax-free withdrawals for qualified medical expenses. No other account in the tax code does all three.
- The employee owns it. The balance rolls over every year and goes with the employee when they leave. There is no use-it-or-lose-it rule.
- 2026 limits: $4,400 self-only and $8,750 family. 2027 limits: $4,500 and $9,000. People 55 and older can add $1,000.
- Employer money counts toward the limit. Whatever the employer puts in reduces what the employee can contribute.
How an HSA works
An HSA is two things working together: a health plan with a higher deductible, and a personal account that pays the costs under that deductible. The employee, the employer or both put money in. The employee spends it on doctor visits, prescriptions, dental and vision care and other qualified medical expenses, or leaves it invested for later.
- Enroll in an HSA-qualified HDHP. The plan has to meet the IRS minimum deductible and stay under the IRS out-of-pocket maximum.
- Open the account. The HSA is held by a bank or other custodian in the employee’s name, not the employer’s.
- Contribute. Most employees contribute through payroll under a Section 125 plan, which also avoids Social Security and Medicare tax.
- Spend or save. Qualified medical expenses come out tax-free at any age. Unused money stays in the account and can be invested.
2026 and 2027 HSA and HDHP limits
| 2026 | 2027 | |
|---|---|---|
| HSA contribution, self-only | $4,400 | $4,500 |
| HSA contribution, family | $8,750 | $9,000 |
| Catch-up contribution, age 55+ | $1,000 | $1,000 |
| HDHP minimum deductible, self-only | $1,700 | $1,750 |
| HDHP minimum deductible, family | $3,400 | $3,500 |
| HDHP out-of-pocket maximum, self-only | $8,500 | $8,700 |
| HDHP out-of-pocket maximum, family | $17,000 | $17,400 |
Figures are from IRS Rev. Proc. 2025-19 (2026) and Rev. Proc. 2026-24 (2027). Contributions for a year can be made up to the tax filing deadline the following April. For how these limits interact with the separate ACA out-of-pocket ceiling, see 2026 and 2027 HDHP and HSA limits.
Who can open and contribute to an HSA
To contribute in a given month, a person must:
- Be covered by an HSA-qualified HDHP on the first day of the month.
- Have no other health coverage that pays before the deductible. A spouse’s general-purpose health FSA counts as other coverage, which trips up a lot of families. A limited-purpose FSA for dental and vision does not.
- Not be enrolled in any part of Medicare. Medicare Part A enrollment can be backdated up to six months, so contributions should stop well before someone applies.
- Not be claimed as a dependent on someone else’s tax return.
Preventive care can be covered before the deductible without breaking eligibility. Federal law now permanently allows HDHPs to cover telehealth before the deductible and, starting in 2026, lets HSA owners join a direct primary care arrangement within a monthly fee cap. See direct primary care for employers.
HSA vs FSA vs HRA
| HSA | Health FSA | HRA | |
|---|---|---|---|
| Who owns it | The employee | The employer’s plan | The employer’s plan |
| Who can fund it | Employee and employer | Mostly the employee | Employer only |
| Requires an HDHP | Yes | No | No (and most HRAs block HSA contributions) |
| Unused money | Rolls over, always | Forfeited, except a limited carryover or grace period | Employer decides |
| Portable when the employee leaves | Yes | No (COBRA may apply) | Usually no |
| Can be invested | Yes | No | No |
An HRA can sit alongside an HSA only if it is designed to be compatible, for example limited to dental and vision or paying only after the HDHP deductible is met. Our guides to the excepted benefit HRA and Section 125 cafeteria plans cover the rules in more detail.
What employers need to know
Employer contributions
Employer contributions are excluded from the employee’s income and count toward the annual limit. If the employer contributes through its Section 125 plan, the cafeteria plan nondiscrimination rules apply. If it contributes outside a Section 125 plan, the HSA comparability rules apply: comparable amounts for all comparable participating employees, with an excise tax for getting it wrong. Many employers seed the account with a lump sum or a per-paycheck amount to take the sting out of the higher deductible.
ERISA
Because the account belongs to the employee, an HSA is generally not an ERISA plan when the employer’s role is limited to offering payroll deduction and making contributions. The HDHP that goes with it is an ERISA plan like any other group health plan.
Plan design and enrollment
An HDHP with an HSA works best when employees understand it. The most common failure is not the plan; it is employees who avoid care because they see a deductible and do not realize the account is there to pay it. See consumer-driven health plan design, HSA employee education and HSAs and consumer-driven health plans.
What an HSA can pay for
- Deductibles, copays and coinsurance.
- Prescriptions, and over-the-counter medicines and menstrual care products.
- Dental and vision care, including glasses and contacts.
- COBRA premiums, and premiums while receiving unemployment benefits.
- Medicare premiums and long-term care insurance premiums (within limits) after age 65.
Money taken out for anything else is taxed as income, plus a 20% penalty before age 65. After 65 the penalty goes away, so non-medical withdrawals are simply taxed like a traditional retirement account.
More plain-English benefits explainers
- What Is an HMO?: how HMO plans work and who they fit
- What Does EE Mean?: EE, ES, EC and family coverage tiers
- What Is Form 1094-C?: the employer transmittal and the 95% offer test
- What Is Form 1095-C?: the employee statement, its codes and deadlines
- What Is an ASO Health Plan?: how administrative services only, self-funded plans work
- How Much Does COBRA Insurance Cost?: averages, deadlines and cheaper options
- What Is a PBM?: how pharmacy benefit managers make money
- What Is EBSA?: the Department of Labor agency that enforces ERISA
- What Is a Broker of Record Letter?: how to change brokers without changing your plan
- Offering Group Health Insurance With No Employer Contribution: a guide for businesses with 2-50 employees
- EAP Benefits for Employees: what an employee assistance program covers
- Health Insurance for Employees: how Michigan employers set up a group plan
Frequently asked questions
What is an HSA in simple terms?
An HSA is a savings account you own that pays for medical expenses with money that is never taxed. You can contribute only while you are covered by an HSA-qualified high-deductible health plan.
What is the HSA contribution limit for 2026?
For 2026 the limit is $4,400 for self-only coverage and $8,750 for family coverage, plus a $1,000 catch-up for people 55 and older. Employer contributions count toward these limits.
What is the HSA contribution limit for 2027?
For 2027 the limit is $4,500 for self-only coverage and $9,000 for family coverage. The $1,000 catch-up for people 55 and older is unchanged.
What happens to my HSA if I leave my job?
It stays yours. The account and every dollar in it, including what your employer put in, goes with you. You can keep spending it on qualified medical expenses even if you no longer have an HDHP, though you can only add new money while you do.
Can I have an HSA and an FSA at the same time?
Only if the FSA is a limited-purpose FSA that covers dental and vision, or a post-deductible FSA. A general-purpose health FSA, including one through your spouse’s employer, makes you ineligible to contribute to an HSA.
Does an employer have to contribute to an HSA?
No. Employer contributions are optional. If an employer does contribute, the amounts must satisfy either the Section 125 nondiscrimination rules or the HSA comparability rules, depending on how they are made.
Is an HSA plan right for your group?
CFH Insurance Consultants is an independent employee benefits firm. We are licensed insurance brokers, and for proper coverage of an account we work in teams of five. We will model an HSA-qualified plan against what you offer today, including the employer seed amount that keeps employees whole, so you can see the premium difference and the real cost to your people before you decide. Start here, call 248.370.8853, or book a 30-minute call.
This article is general information, not tax or legal advice. HSA and HDHP limits are adjusted by the IRS each year; confirm current figures and individual eligibility with a tax advisor.
