Health Savings Accounts are the most tax-advantaged vehicle in the benefits stack — contributions are excluded from income, growth is untaxed, and qualified distributions are untaxed. Triple advantage, available nowhere else.
They are also the benefit employees are most likely to use incorrectly, because eligibility is not a one-time determination. It is tested month by month, and a change an employee makes for entirely unrelated reasons — enrolling in Medicare, joining a spouse's FSA — can silently disqualify them and turn contributions into excess contributions carrying an annual excise tax.
These amounts are indexed annually. The IRS publishes each year's numbers in a revenue procedure issued the previous spring — it is required to do so by June 1 — so next year's limits are always known well before the plan year starts. The 2027 amounts below come from Rev. Proc. 2026-24, issued May 29, 2026.
For comparison, the 2026 amounts were $4,400 and $8,750 for contributions, $1,700 / $3,400 for minimum deductibles, and $8,500 / $17,000 for out-of-pocket maximums. The related excepted-benefit HRA maximum is $2,250 for plan years beginning in 2027.
Two structural points about these numbers that do not change:
An individual is HSA-eligible for a month if, as of the first day of that month, all four are true:
Because eligibility is monthly, the annual maximum is effectively prorated: an individual eligible for seven months of the year may generally contribute seven-twelfths of the annual limit, plus seven-twelfths of any catch-up — unless the last-month rule applies.
This is where most eligibility failures originate, and almost always accidentally.
The spouse's FSA problem deserves its own paragraph. A general purpose health FSA is treated as covering the employee's spouse and dependents, because it can reimburse their expenses. An employee enrolled in an HDHP whose spouse elects a general purpose health FSA at a different employer is not HSA-eligible — and neither of them will realize it. Flag this explicitly in your open enrollment materials; it is the most common silent disqualification.
The FSA grace period problem. An employee with a general purpose health FSA balance carried into a grace period remains ineligible for HSA contributions through the end of that grace period. Employees moving from an FSA-paired plan to an HDHP at the start of a year are frequently ineligible for the first few months without knowing it.
An individual who is HSA-eligible on December 1 is treated as eligible for the entire year and may contribute the full annual maximum, regardless of how many months they were actually eligible.
The catch: a testing period applies. The individual must remain HSA-eligible through the end of the following calendar year. If they do not — they change to a non-HDHP plan, enroll in Medicare, become someone's dependent — the amount attributable to the months they were not actually eligible becomes includible in income and subject to an additional 10 percent tax.
The last-month rule is genuinely useful for mid-year hires who will stay on the HDHP. It is a trap for anyone approaching Medicare eligibility or considering a plan change.
This is the single most common and most expensive HSA error, and it affects employees who did everything they thought was right.
Three facts combine badly:
The result: an employee who continues working past 65, contributes to their HSA all year, and then claims Social Security in the fall discovers that their Part A coverage was retroactive to spring — making months of contributions excess contributions.
What to do: an employee planning to work past 65 who wants to keep contributing to an HSA must not enroll in any part of Medicare and must not claim Social Security benefits. An employee who is going to enroll should stop HSA contributions at least six months before the Medicare or Social Security application.
Communicate this proactively to every employee approaching 65. They will not learn it anywhere else, and the correction is unpleasant.
Employer HSA contributions are excluded from the employee's gross income and from wages for Social Security, Medicare, and FUTA purposes.
Two different nondiscrimination regimes apply, depending on how you make the contributions:
The comparability rules apply. Employers must make comparable contributions, meaning the same dollar amount or the same percentage of the deductible, to all comparable participating employees within each category (full-time, part-time, former employees), with self-only and family coverage treated as separate categories. Failure carries a substantial excise tax. The comparability rules are rigid and permit almost no variation.
The comparability rules do not apply. Instead, the Section 125 nondiscrimination rules apply, which are considerably more flexible and permit matching contributions, wellness-linked contributions, and variation by group.
The practical consequence: most employers should make HSA contributions through a cafeteria plan, because it permits designs the comparability rules prohibit. See our Section 125 training and Cafeteria Plan FAQs.
Employers may contribute the full annual amount at the start of the year. If an employee then leaves or becomes ineligible, the employer generally cannot recover the contribution — the HSA belongs to the employee. Most employers contribute per pay period for this reason.
Contributions for a tax year may be made until the tax filing deadline for that year, generally April 15, without extensions. This is a genuine planning opportunity that employees rarely use.
Amounts above the limit are subject to a 6 percent excise tax for each year they remain in the account. Correct by withdrawing the excess, plus net income attributable to it, before the tax filing deadline including extensions.
Note that Box 12 code W captures both employer and pre-tax employee contributions. Employees frequently misread this as employer money alone.
Distributions. Qualified medical expense distributions are tax-free. Non-qualified distributions are subject to income tax plus a 20 percent additional tax — which does not apply after age 65, or on account of death or disability.
Ongoing value: HSAs are employee-owned and fully portable. They can pay COBRA premiums — one of the few insurance premiums HSA funds may cover — and after age 65 they can pay Medicare premiums (though not Medigap).
No, if the spouse's FSA is a general purpose health FSA, because it can reimburse the employee's expenses. A limited purpose FSA covering only dental and vision does not disqualify.
No. Any Medicare enrollment, including premium-free Part A alone, ends eligibility. Employees working past 65 who want to keep contributing must not enroll in Medicare or claim Social Security.
Each spouse aged 55 or older may make a catch-up contribution, but it must go into that spouse's own HSA. A couple cannot make two catch-up contributions into one account.
An individual eligible on December 1 may contribute the full annual maximum for that year — provided they remain eligible through the end of the following calendar year. Failing that testing period makes part of the contribution taxable plus an additional 10 percent tax.
Outside a cafeteria plan, the comparability rules require comparable contributions within categories and permit very little variation. Through a cafeteria plan, the more flexible Section 125 nondiscrimination rules apply instead, permitting matching and wellness-linked designs.
The tax filing deadline for that year, generally April 15, without extensions.
Eligibility is monthly, not annual, and the two things most likely to break it are a spouse's general purpose FSA and Medicare enrollment. Communicate both proactively — particularly to employees approaching 65, where the six-month retroactive Part A rule creates excess contributions nobody anticipated. Then make employer contributions through a cafeteria plan unless you have a reason not to.
For structured instruction, explore our Section 125 training and Employer Benefits resources, or review the Glossary of Cafeteria Plan Terms.
Recommended In-Person Seminars
