An HSA, or health savings account, is a tax-advantaged account employees can use to pay medical expenses if they're enrolled in a qualifying high-deductible health plan. Contributions are tax-free, growth is tax-free, and withdrawals for qualified medical costs are tax-free; the 2026 limits are $4,400 for self-only and $8,750 for family coverage.
Key takeaways
- Only people covered by an HSA-eligible high-deductible health plan, with no disqualifying coverage, can contribute.
- The account belongs to the employee and stays with them when they change jobs.
- Unused money rolls over every year; there's no use-it-or-lose-it rule.
- People 55 and older can add a $1,000 catch-up contribution.
How HSA works
To contribute, an employee needs an HSA-eligible high-deductible health plan, which for 2026 means a deductible of at least $1,700 for self-only or $3,400 for family coverage. They can't also be enrolled in Medicare or a general-purpose health FSA (Davis Wright Tremaine, IRS 2026 benefit plan limits).
Contributions can come from the employee, the employer, or both, as long as the total stays under the annual limit. When employees contribute through a Section 125 cafeteria plan, their contributions skip federal income tax and FICA. Employer contributions are also excluded from wages and reported in box 12 of the W-2 with code W.
The money can be spent on qualified medical expenses at any time, invested, or saved for retirement. After 65, withdrawals for non-medical purposes are taxed like a traditional IRA but without the penalty (IRS Publication 969, HSAs and other tax-favored health plans).
HSA example
An engineer with family HDHP coverage contributes $300 a month through payroll, and her employer adds $1,000 a year.
| Employee payroll contributions, 12 x $300 | $3,600 |
|---|---|
| Employer contribution | $1,000 |
| Total for 2026 | $4,600 of the $8,750 family limit |
| Federal income tax and FICA saved, at 22% plus 7.65% | about $1,067 on her own contributions |
She could contribute another $4,150 this year. Unused funds carry forward, and she can invest the balance once it passes the custodian's minimum.
Why HSA matters for employers
HSAs are a growing share of employer benefits. According to the KFF 2025 Employer Health Benefits Survey, 33% of covered workers were enrolled in a high-deductible plan with a savings option in 2025. For employers, HSA-qualified plans usually carry lower premiums, and payroll contributions through a cafeteria plan reduce the employer's FICA cost.
The administration has traps, though. If an employee becomes ineligible mid-year, for example by enrolling in Medicare, contributions must stop and the limit is prorated. Employer contributions must also be comparable across employees in the same category unless they go through a cafeteria plan. Benefits software and a good HSA custodian take care of most of this.
Common HSA mistakes to avoid
Pairing an HSA with a general-purpose FSA
A general FSA disqualifies HSA contributions. Offer a limited-purpose FSA for dental and vision instead.
Letting contributions exceed the limit
Excess contributions are taxable and face a 6% excise tax unless removed in time.
Continuing contributions after Medicare enrollment
Medicare enrollment ends HSA eligibility, even if the employee is still working.
Unequal employer contributions outside a cafeteria plan
Comparability rules require similar contributions for comparable employees.
HSA: questions people also ask
What is the HSA contribution limit for 2026?
What is the difference between an HSA and an FSA?
Can an employer contribute to an employee's HSA?
What happens to an HSA when an employee leaves?
Can HSA money be invested?
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HRTally glossary entries are written by people who have run US payroll, benefits, and HR operations, then checked line by line against primary sources such as the IRS, Department of Labor, EEOC, and Bureau of Labor Statistics. Dollar limits and rates are for 2026 unless stated. We review every entry at least twice a year and whenever a rule changes. This page explains general rules and isn't legal or tax advice; state law can differ. Read our editorial standards.
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<blockquote>An HSA, or health savings account, is a tax-advantaged account employees can use to pay medical expenses if they're enrolled in a qualifying high-deductible health plan. Contributions are tax-free, growth is tax-free, and withdrawals for qualified medical costs are tax-free; the 2026 limits are $4,400 for self-only and $8,750 for family coverage.</blockquote><p>Source: <a href="https://www.hrtally.com/hr-glossary/hsa/">HRTally HR Glossary, HSA</a></p>
Written by the HRTally Research Team
Our guides are written and reviewed by people with hands-on US HR, payroll, and HR technology experience. Legal and tax facts are checked against primary sources, such as the Department of Labor, IRS, EEOC, and USCIS, and linked at the end of each guide. Vendors never review or pay for our editorial content.