Employer HSA Contributions: Limits, Comparability, and Excise Tax

Employer contributions to a Health Savings Account are governed by a tight set of federal rules: you can only contribute for employees enrolled in a qualifying High Deductible Health Plan, the combined total from all sources cannot exceed the annual IRS limit ($4,400 self-only or $8,750 family for 2026), and if you contribute directly outside a cafeteria plan you must give comparable amounts to every similarly situated employee or face a 35% excise tax on the entire year’s contributions. Employer HSA contribution rules also intersect with cafeteria plan nondiscrimination testing, W-2 reporting, ERISA, and a handful of state tax quirks, and the One, Big, Beautiful Bill Act expanded who qualifies starting in 2026.

Which Employees You Can Contribute For

An employer can only contribute to the HSA of an “eligible individual.” The employee must be covered by a qualifying HDHP on the first day of the month, carry no disqualifying health coverage, not be enrolled in Medicare, and not be claimed as a dependent on someone else’s return.¹ Disqualifying coverage includes a general-purpose health FSA or an HRA that reimburses medical expenses before the HDHP deductible is met.

The HDHP itself has to clear IRS thresholds. For 2026, the plan needs a minimum annual deductible of $1,700 self-only or $3,400 family, and out-of-pocket costs (excluding premiums) cannot exceed $8,500 self-only or $17,000 family.²

Expanded Eligibility in 2026

Three changes under the One, Big, Beautiful Bill Act widen the pool of eligible employees starting in 2026. Bronze-level and catastrophic ACA Exchange plans (and equivalent off-Exchange plans) now count as HDHPs even without meeting the traditional deductible thresholds, and the standard out-of-pocket ceilings don’t apply to them.³ Employees enrolled in a direct primary care arrangement charging a flat periodic fee remain HSA-eligible, and HSA funds can pay those fees. And the telehealth-before-deductible safe harbor is now permanent, so an HDHP can cover telehealth pre-deductible without disqualifying the participant.⁴

2026 Contribution Limits

The annual limit is a combined cap covering everything that flows into the account from the employer, the employee, and any third party. For 2026:

Self-only HDHP coverage: $4,400
Family HDHP coverage: $8,750
Catch-up contribution for employees age 55 through 64: an additional $1,000

The self-only and family amounts adjust each year for inflation. The $1,000 catch-up is set by statute and doesn’t move.⁵ Catch-up eligibility ends when the employee enrolls in Medicare; the monthly contribution limit drops to zero for that month and every month after.¹

Contributions are normally prorated by months of eligibility. An employee who becomes eligible in July gets roughly half the annual limit. Under the “last-month rule,” an employee HSA-eligible on December 1 can contribute the full annual amount, provided they stay eligible through the following December 31. If they don’t, the excess above the prorated amount becomes taxable income plus a 10% additional tax.¹ That fallout hits the employee, not the employer, but it’s worth flagging when designing a mid-year onboarding contribution.

Comparability: The Rule That Trips Employers Up

When you contribute directly to employee HSAs outside a cafeteria plan, federal law requires that you give the same dollar amount, or the same percentage of the HDHP deductible, to every “comparable participating employee” for the calendar year.⁶

Employees are comparable when they share both employment status (full-time or part-time) and coverage category. The IRS recognizes only two coverage categories here: self-only, and everything else. Employee-plus-spouse and employee-plus-family are the same group. You cannot give one more than the other.⁶

There is one useful carve-out. When testing comparability for non-highly-compensated employees, highly compensated employees are excluded from the comparison group. You can contribute different (typically smaller) amounts to highly compensated employees without breaking comparability for the rest of the workforce. The reverse is not permitted.⁷

The 35% Excise Tax

A comparability failure isn’t a proportional penalty. The excise tax is 35% of every dollar contributed to all employee HSAs that calendar year, not just the unequal portion. Put $100,000 into employee HSAs and shortchange one group, and the bill is $35,000.⁶ The penalty scales with the size of your program, not the size of your mistake, which is why comparability is where most compliance problems become expensive fast.

The Cafeteria Plan Workaround

Employer HSA contributions made through a Section 125 cafeteria plan are exempt from the comparability rules entirely. This is the single most consequential design choice in any HSA program. Under a cafeteria plan, matching contributions, tiered contributions by tenure or coverage, and non-uniform formulas are all fair game.⁸

The tradeoff is that cafeteria plans carry their own Section 125 nondiscrimination tests: an eligibility test, a contributions-and-benefits test, and a key employee concentration test. Failing any of them costs highly compensated participants their favorable tax treatment; their HSA contributions get pulled back into taxable income. Rank-and-file employees are unaffected by the failure. For 2026, a highly compensated employee is generally one who earned more than $160,000 in the prior year.⁹

Most medium and large employers route HSA contributions through a cafeteria plan for exactly this reason. Pre-tax salary reductions, employer matches, and seed contributions can sit inside the same plan, giving real design latitude as long as Section 125 testing passes.

Tax Treatment on the Employer Side

Employer HSA contributions that follow the rules receive some of the most favorable treatment in the benefits code. They’re excluded from the employee’s gross income under Section 106(d),¹⁰ and the exclusion runs through payroll taxes too. Contributions are exempt from Social Security, Medicare, and FUTA. Pre-tax salary reductions through a cafeteria plan get the same treatment.¹¹ Contributions are deductible as a business expense in the calendar year made.

W-2 Reporting

Report all HSA contributions in Box 12 using Code W. That single figure combines direct employer contributions and any pre-tax salary reductions the employee made through a cafeteria plan.¹² Employees rely on this number for Form 8889, so errors here cascade into their return.

Fixing Mistaken Employer Contributions

Excess contributions (where the combined total exceeds the annual limit) are the employee’s problem to correct with the HSA custodian, and the 35% excise tax does not apply to over-contributions, only to comparability failures.

Mistaken contributions are different. Under IRS Notice 2008-59, an employer may ask the HSA custodian to return a contribution in two situations: the employee was never HSA-eligible, or an administrative error pushed the contribution past the statutory maximum. Common examples are payroll glitches, decimal-point errors, and confusing two employees with similar names.¹³ The recovery puts both sides back where they would have been, including earnings on the mistaken amount minus any fees. If you don’t recover the amount by year-end, include it in the employee’s gross income and wages on the W-2.

One important limit: if the contribution was within the statutory maximum and the employee was eligible, you have no right to claw it back, even if you regret the amount.¹³

Termination and COBRA

The HSA belongs to the employee and travels with them. You have no obligation to keep contributing after termination, even if the former employee elects COBRA under your HDHP. The HSA itself is not a medical plan and is not subject to COBRA.

Because eligibility is determined on the first of the month, an employee terminating mid-month who was covered under the HDHP on the first of that month can still receive an employer contribution for that month. After that, employer contributions typically stop; the former employee can keep contributing on their own for any month they remain HSA-eligible.¹

Keeping the Program Out of ERISA

Most employers want to avoid having the HSA program treated as an ERISA welfare benefit plan, which would bring fiduciary duties, plan documents, and Form 5500 filings. The Department of Labor has laid out conditions for staying outside ERISA. The employer must not:

restrict employees from moving HSA funds to a different custodian
impose spending conditions beyond what the tax code already requires
steer employees toward specific investments inside the HSA
represent the HSA as an employer-sponsored welfare benefit plan
receive payments or kickbacks from the HSA provider

Participation has to be voluntary. The DOL has clarified, though, that you can unilaterally open an HSA for an employee and deposit employer funds without breaking the voluntary requirement, as long as the employee retains full control afterward. You can also limit which HSA providers may market to employees or pick a single provider for payroll contributions.¹⁴

State Tax Wrinkles

Federal rules provide the income exclusion and payroll tax exemptions above, but not every state conforms. California and New Jersey don’t recognize the HSA deduction or exclusion at the state level; employees there owe state income tax on employer contributions and on investment gains inside the account. Nine states have no state income tax, so the question doesn’t arise. Everywhere else, HSA contributions generally get the same treatment they do federally. Payroll and W-2 systems need to be configured for the state where the employee works.

1
Internal Revenue Service. Publication 969 (2025), Health Savings Accounts and Other Tax-Favored Health Plans
2
Internal Revenue Service. Rev. Proc. 2025-19
3
Internal Revenue Service. Treasury, IRS Provide Guidance on New Tax Benefits for Health Savings Account Participants Under the One Big Beautiful Bill
4
Internal Revenue Service. IRS Notice 2026-05 – Expanded Availability of Health Savings Accounts Under the OBBBA
5
Office of the Law Revision Counsel. 26 USC 223 – Health Savings Accounts
6
eCFR. 26 CFR 54.4980G-1 – Failure of Employer to Make Comparable Health Savings Account Contributions
7
Office of the Law Revision Counsel. 26 USC 4980G – Failure of Employer to Make Comparable Health Savings Account Contributions
8
Internal Revenue Service. Employer Comparable Contributions to Health Savings Accounts Under Section 4980G
9
Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs, as Adjusted for Cost of Living
10
GovInfo. 26 USC 106 – Contributions by Employer to Accident and Health Plans
11
U.S. Department of Labor. UIPL 15-04 Wages – Treatment of Health Savings Accounts
12
Internal Revenue Service. General Instructions for Forms W-2 and W-3 (2026)
13
Internal Revenue Service. IRS Notice 2008-59 – Health Savings Accounts
14
U.S. Department of Labor. Field Assistance Bulletin No. 2006-02