How HSAs and HDHPs Can Help Manage Rising Health Care Costs

What individuals, families, and business owners should understand before choosing a high-deductible health plan

Introduction

Health care costs continue to place pressure on many households and business owners. Premiums, deductibles, prescriptions, and out-of-pocket expenses can make it difficult to feel confident about choosing the right health insurance strategy. For some taxpayers, a Health Savings Account, often called an HSA, paired with a qualifying High-Deductible Health Plan, or HDHP, may provide a useful way to manage medical costs while receiving valuable tax benefits.

That said, HSAs are not one-size-fits-all. They can be powerful planning tools when used correctly, but eligibility rules, contribution limits, and qualified expense rules matter. The goal is not simply to pick the lowest premium plan. The goal is to understand how the plan works, what risks you are taking on, and whether the tax advantages fit your broader financial picture.

What Is an HSA?

An HSA is a tax-advantaged account available to eligible individuals who are covered by a qualifying HDHP. Money contributed to the account can be used to pay for qualified medical expenses for the account holder, spouse, and dependents. Unlike many flexible spending arrangements, unused HSA funds generally roll over from year to year, which can make the account useful for both current medical costs and longer-term planning.

The key benefit of an HSA is its triple tax advantage. Contributions are generally deductible or excluded from income when made through an employer. Earnings inside the account can grow tax-free while held in the HSA. Withdrawals are tax-free when used for qualified medical expenses. For taxpayers who are eligible and who can contribute consistently, this combination can make an HSA one of the more tax-efficient savings tools available.

How an HDHP Fits Into the Picture

An HDHP is a health insurance plan that meets IRS requirements for minimum deductibles and maximum out-of-pocket costs. These plans often have lower monthly premiums than more traditional plans, but the tradeoff is that the taxpayer may pay more out of pocket before insurance begins covering many costs. Preventive care can generally be covered before the deductible without causing the plan to lose HDHP status.

For 2026, a qualifying HDHP generally must have a minimum deductible of at least $1,700 for self-only coverage or $3,400 for family coverage. The maximum out-of-pocket limit, not including premiums, generally cannot exceed $8,500 for self-only coverage or $17,000 for family coverage. Those numbers are important because a plan with a high deductible is not automatically HSA-compatible. The plan must meet the IRS definition.

2026 HSA Contribution Limits

For 2026, the HSA contribution limit is $4,400 for self-only coverage and $8,750 for family coverage. Individuals who are age 55 or older by the end of the tax year may contribute an additional $1,000 catch-up contribution if they are otherwise eligible.

For married couples, each spouse who wants to make catch-up contributions must have a separate HSA. There is no joint HSA. This is a common planning detail that can be easy to miss, especially when both spouses are 55 or older and covered under family HDHP coverage.

Contributions can be made by the account holder, an employer, a family member, or another person, but total contributions must stay within the annual limit. Employer contributions count toward the limit. Contributions must also be made in cash, not property or stock.

Who Is Eligible to Contribute?

To contribute to an HSA, a taxpayer generally must be covered under a qualifying HDHP and must not have disqualifying health coverage. They also cannot be claimed as a dependent on someone else’s tax return. Coverage such as dental, vision, disability, accident coverage, and certain long-term care coverage may be allowed without affecting HSA eligibility.

Medicare enrollment is an important limitation. Beginning with the first month an individual is enrolled in Medicare, that individual generally can no longer contribute to an HSA. Existing HSA funds can still be used for qualified medical expenses, but new contributions are no longer allowed once Medicare enrollment begins. This becomes especially important for taxpayers approaching age 65 or delaying Medicare enrollment, because retroactive Medicare coverage can create excess HSA contribution issues.

Newer HSA Rules to Watch

Recent law changes expanded HSA access in several ways. Telehealth and other remote care services may now be provided before the HDHP deductible is met without automatically disqualifying HSA eligibility. This rule applies permanently for plan years beginning on or after January 1, 2025.

Beginning January 1, 2026, certain bronze and catastrophic plans are treated as HSA-compatible, even if they do not otherwise meet the general HDHP definition. IRS guidance also clarifies that the plan does not have to be purchased through an Exchange to qualify for this relief. This may expand HSA eligibility for some individuals who previously had marketplace-style coverage that did not meet the traditional HDHP requirements.

Direct primary care arrangements also received new treatment beginning in 2026. An otherwise eligible individual may be able to participate in certain direct primary care service arrangements without losing HSA eligibility, and HSA funds may be used tax-free for qualifying periodic direct primary care fees. For 2026, the monthly fee limit is generally $150 for one individual or $300 for arrangements covering more than one individual, with inflation adjustments after 2026. Because the rules are specific, taxpayers should confirm that an arrangement qualifies before relying on HSA treatment.

What Expenses Can an HSA Pay For?

HSA funds can be used tax-free for qualified medical expenses. In general, these are unreimbursed medical care expenses for the account holder, spouse, or dependents. Common examples may include doctor visits, prescriptions, dental care, vision care, certain over-the-counter medicines, insulin, menstrual care products, and other eligible medical costs.

Health insurance premiums are generally not qualified medical expenses for HSA purposes, but there are exceptions. HSA funds may be used for certain long-term care insurance premiums, COBRA continuation coverage, health coverage while receiving unemployment compensation, and, for individuals age 65 or older, certain Medicare and other health coverage premiums. Medigap premiums are not included in that Medicare exception.

One important record keeping point: expenses reimbursed from an HSA cannot also be deducted as itemized medical expenses. Taxpayers should keep receipts and documentation showing that HSA distributions were used for qualified medical expenses and were not reimbursed elsewhere.

What Happens If HSA Funds Are Used for Nonqualified Expenses?

If HSA funds are used for something other than qualified medical expenses, the distribution is generally taxable. Before age 65, the nonqualified amount is also generally subject to an additional 20% tax. After the account holder reaches age 65, becomes disabled, or dies, the additional 20% tax does not apply, although nonqualified distributions may still be taxable as income.

This is one reason HSAs can have retirement planning value. Funds used for qualified medical expenses remain tax-free. If funds are used for nonmedical purposes after age 65, the distribution may be taxable but generally is not subject to the additional 20% tax. Unlike some retirement accounts, HSA balances generally do not have to be withdrawn each year, and unused amounts can carry forward.

Why HSAs Can Be Valuable, But Not Automatic

The tax benefits of an HSA can be meaningful, but the decision to use an HDHP should still be practical. A lower monthly premium may look attractive, but the higher deductible can create real cash flow strain if a major medical expense occurs early in the year. Families with predictable medical needs, ongoing prescriptions, or limited emergency savings should compare total expected costs rather than focusing only on premiums.

For business owners, HSAs can also be part of broader employee benefits planning. However, employer contributions, payroll deductions, eligibility, and nondiscrimination rules should be handled carefully. A good benefits strategy should help employees understand the plan, not leave them surprised by the deductible later.

Practical Steps Before Choosing an HSA Strategy

Before choosing an HDHP and HSA combination, review the plan documents to confirm the plan is HSA-compatible. Estimate annual medical costs based on prescriptions, appointments, family needs, and likely out-of-pocket expenses. Consider whether you have enough cash reserves to handle the deductible if costs arise suddenly. If you are nearing Medicare eligibility, review timing carefully before making contributions.

It is also wise to create a record keeping system. Keep receipts, explanation of benefits statements, pharmacy records, and HSA statements. The tax benefits are valuable, but they work best when the documentation is organized before questions come up.

How BSG Can Help

HSAs and HDHPs can be helpful tools, but they work best when they are matched to the taxpayer’s actual financial situation. Contribution limits, Medicare timing, employer benefits, qualified expenses, and cash flow all matter.

If you are considering an HSA, reviewing your current coverage, or trying to understand how these rules affect your tax planning, BSG can help you look at the numbers clearly. The right decision should support both your health care needs and your financial stability.

This information is intended for general educational purposes and should not be considered individualized tax, legal, or benefits advice. HSA eligibility and tax treatment depend on individual circumstances and may change as additional guidance is issued.