As healthcare costs continue to rise, many individuals and families are looking for effective ways to manage their expenses. One option receiving increased attention is the combination of a Health Savings Account, or HSA, and a High-Deductible Health Plan, or HDHP.
Together, an HSA and HDHP can provide individuals with greater control over their healthcare spending while offering potential tax advantages. As traditional health insurance premiums continue to increase, understanding how these accounts and plans work together can help individuals and families determine whether they are an appropriate fit.
This article explores the benefits, considerations, and potential savings associated with HSAs and HDHPs.
At its core, an HSA is a tax-advantaged account available to eligible individuals enrolled in an HSA-qualified HDHP. Contributions may be made with pre-tax dollars, earnings within the account generally grow tax-free, and withdrawals used for qualified medical expenses are also tax-free.
The Structure and Benefits of HSAs
HSAs are structured to offer three primary tax benefits, setting them apart from many other savings and investment accounts.
1. Tax-Deductible Contributions
Contributions to an HSA may be made with pre-tax dollars, reducing an individual’s taxable income. This can create meaningful tax savings, particularly for individuals in higher tax brackets.
2. Tax-Free Growth
Funds within the account may earn interest or investment returns without being subject to federal income tax. This allows the account balance to grow over time without the tax impact that may apply to other types of accounts.
3. Tax-Free Withdrawals
Withdrawals used to pay qualified medical expenses generally are not subject to federal income tax. HSA funds may be used for a wide range of healthcare-related expenses without creating an additional tax burden.
4. Nonmedical Withdrawals
Before age 65, withdrawals that are not used for qualified medical expenses generally are taxable and subject to an additional 20% tax.
5. Withdrawals After Age 65
After reaching age 65, an individual may take distributions for purposes other than qualified medical expenses without incurring the additional 20% tax. However, the distribution is generally included in taxable income, similar to a distribution from a traditional IRA.
6. Death of the Account Holder
The treatment of an HSA after the account holder’s death depends on the designated beneficiary.
If the beneficiary is the account holder’s spouse, the HSA generally remains intact and becomes the spouse’s HSA. If the beneficiary is not the account holder’s spouse, the account generally ceases to be an HSA, and its value becomes taxable income to the beneficiary.
Using an HSA as a Retirement Vehicle
Establishing and contributing to an HSA can provide more than current tax savings and greater control over medical expenses. It may also serve as a retirement-planning tool, particularly for taxpayers who have maximized their other retirement plan contributions or cannot contribute to an IRA because of applicable income limitations.
There is no requirement that qualified medical expenses be paid or reimbursed from the HSA when they are incurred. An individual who can pay routine medical expenses from other funds may choose to leave the HSA balance invested, allowing the account to continue growing tax-free.
Later, distributions may be taken tax-free to pay or reimburse qualified medical expenses, including eligible medical expenses incurred during retirement. If the funds are used for non-medical purposes after age 65, the individual generally will owe income tax on the distribution but will not be subject to the additional 20% tax.
Unlike traditional IRAs and many employer-sponsored retirement accounts, HSAs are not subject to required minimum distributions at a specific age.
Eligibility for an HSA
To contribute to an HSA, an individual generally must meet specific eligibility requirements.
Enrollment in an HDHP
The individual must be covered by an HSA-qualified High-Deductible Health Plan that meets the minimum deductible and maximum out-of-pocket thresholds established by the IRS.
No Other Disqualifying Coverage
The individual generally cannot have other health insurance that provides coverage before the HDHP deductible is met. Exceptions may apply for certain types of limited coverage, including dental, vision, disability, and long-term care insurance.
Medicare Coverage
Individuals generally may not contribute to an HSA once they are enrolled in Medicare, which commonly occurs around age 65. However, they may continue using funds already held in the account.
Medicare enrollment may sometimes be retroactive, so individuals approaching age 65 should carefully review the timing of their final HSA contributions.
Veterans Affairs Coverage
Receiving hospital care or medical services through the Department of Veterans Affairs may affect HSA eligibility. However, an individual may remain eligible when receiving care for a service-connected disability or when another applicable exception is met. Additional information is available in IRS Publication 969.
Dependency Status
The account holder cannot be eligible to be claimed as a dependent on another person’s tax return.
Understanding High-Deductible Health Plans
An HDHP is a type of health insurance that generally has lower monthly premiums and higher annual deductibles than more traditional plans.
Under an HDHP, an individual typically pays the full cost of medical care until the deductible is met. After the deductible is reached, the insurance company begins sharing eligible costs through coinsurance or copayments.
2026 IRS Requirements
For a plan to be classified as a qualified HDHP in 2026, it generally must meet the following financial thresholds:
- Minimum deductible: At least $1,700 for self-only coverage or $3,400 for family coverage
- Maximum out-of-pocket limit: No more than $8,500 for self-only coverage or $17,000 for family coverage
The maximum out-of-pocket limit includes deductibles and coinsurance but does not include insurance premiums.
Beginning in 2026, individual-market Bronze and Catastrophic plans are treated as qualifying HDHPs for HSA purposes, even when they do not meet the standard deductible and out-of-pocket limits.
Direct Primary Care Arrangements
Also beginning in 2026, an individual enrolled in an HDHP may participate in certain direct primary care arrangements without jeopardizing HSA eligibility.
A direct primary care arrangement generally provides primary care services for a fixed periodic fee. For 2026, the fee may not exceed $150 per month for one individual or $300 per month when the arrangement covers more than one individual. These limits will be adjusted annually for inflation after 2026.
Fees paid for a qualifying direct primary care arrangement are treated as medical expenses rather than payments for health insurance.
Key Features of an HDHP
HSA Eligibility
HDHPs generally are the only health plans that may be paired with an HSA, subject to certain exceptions beginning in 2026. An HSA allows an eligible individual to set aside pre-tax funds for qualified medical expenses.
Preventive Care
Most HDHPs cover qualifying in-network preventive services, such as certain vaccinations and screenings, without requiring the deductible to be met first.
Telehealth Services
HDHPs may cover qualifying telehealth and remote care services before the deductible is met without affecting the insured individual’s HSA eligibility.
2026 HSA Contribution Limits
HSA contribution limits are adjusted periodically for inflation. Contributions may be deductible above the line, reducing the taxpayer’s adjusted gross income.
The HSA contribution limits for 2026 are:
- Self-only coverage: $4,400
- Family coverage: $8,750
- Catch-up contribution for individuals age 55 or older: $1,000
If both spouses are age 55 or older and otherwise eligible, each spouse may contribute an additional $1,000 to an HSA held in their own name.
Employer and Employee Contributions
Both employers and employees may contribute to an HSA. Employee contributions may be made through payroll deductions or deposited directly into the account.
Employer contributions generally are excluded from the employee’s taxable income and are not deducted again on the employee’s individual income tax return.
Contributions Made by Others
An account holder generally receives the deduction for contributions made to their HSA, even when another person, such as a family member, provides the funds. All contributions are subject to the account holder’s annual contribution limit.
Distributions used for qualified medical expenses may be tax-free. However, the same expenses cannot also be claimed as an itemized medical deduction on Schedule A.
Excess Contributions
Contributions exceeding the annual limit may be subject to a 6% excise tax.
An individual may generally avoid the excise tax by withdrawing the excess contribution and any related earnings by the applicable tax-filing deadline, including extensions.
Qualified Medical Expenses
Qualified medical expenses generally include unreimbursed expenses paid for the medical care of the account beneficiary, the beneficiary’s spouse, or eligible dependents.
These expenses generally follow the definition of medical care under Internal Revenue Code Section 213(d), which is also used for itemized medical deductions.
Qualified expenses may include:
- Physician fees
- Hospital services
- Prescription medications
- Over-the-counter medications
- Insulin
- Menstrual care products
- COVID-19 personal protective equipment
- Dental and vision care
- Certain medical equipment and supplies
Health Insurance Premiums
Health insurance premiums generally are not qualified medical expenses for HSA purposes. However, exceptions may apply to the following:
- Qualified long-term care insurance premiums, subject to applicable annual age-based limits
- COBRA healthcare continuation coverage
- Healthcare coverage paid while the account holder is receiving unemployment compensation
- Certain premiums paid by individuals age 65 or older, including Medicare Parts A, B, and D, Medicare HMO coverage, and the employee share of certain employer-sponsored health insurance or retiree health insurance premiums
Medigap policy premiums generally do not qualify.
Nonqualified Distributions
Distributions may be taken from an HSA at any time.
When distributions are used exclusively to pay qualified medical expenses for the account beneficiary, spouse, or eligible dependents, they generally are excluded from taxable income.
Amounts used for purposes other than qualified medical expenses generally are included in the account beneficiary’s taxable income and are subject to an additional 20% tax.
The additional tax generally does not apply when the distribution is made because of the beneficiaries:
- Death
- Disability
- Attainment of age 65
Amounts withdrawn directly from an HSA to pay the account’s administration or maintenance fees generally are not treated as taxable distributions.
If these fees are paid directly by the account beneficiary or employer, they generally are not considered HSA contributions and do not count toward the annual contribution limit.
Correcting a Mistaken Nonqualified Distribution
If an HSA distribution was made because of a reasonable mistake, the account beneficiary may be permitted to repay the amount by April 15 of the year after discovering the error.
When the applicable requirements are met, the distribution generally is not included in taxable income, is not subject to the additional 20% tax, and the repayment is not treated as an excess contribution.
Establishing an HSA
An HSA may be established through a qualified trustee or custodian, such as a bank, credit union, insurance company, or another approved financial institution.
Earned income is not required to establish or contribute to an HSA. Contributions may come from the account holder, an employer, or another individual.
However, contributions generally must be made in cash. Stocks, securities, and other forms of property generally cannot be contributed directly to an HSA.
Is an HSA and HDHP Combination Right for You?
An HDHP paired with an HSA can provide lower insurance premiums, greater control over healthcare spending, and meaningful tax advantages. It can also require the insured individual or family to pay more upfront when medical care is needed.
Before selecting an HDHP, it is important to compare the plan’s monthly premiums, deductible, out-of-pocket limit, provider network, prescription coverage, and expected healthcare expenses. Employer HSA contributions and the ability to cover unexpected medical costs should also be part of the decision.
DBC can help you evaluate how an HSA may fit into your broader tax and financial strategy. Reviewing the potential tax benefits alongside your healthcare needs, cash flow, and long-term goals can help you make a more informed decision.
This article provides general tax and accounting insights and is not intended as advice specific to your organization or a substitute for personal consultation. We do not provide legal advice. Because every organization’s circumstances are unique, we encourage you to consult with your legal, tax, or accounting advisor regarding your specific situation.