HSAs and Health Coverage Tax Credits

A health savings account (HSA) is one of the few tax-favored accounts with three tax benefits at once: contributions are deductible, growth is tax-free, and withdrawals are tax-free when used for medical expenses. If you buy coverage on the Marketplace, the premium tax credit can lower your premium, but it has to be reconciled on your return. The One Big Beautiful Bill Act changed both areas starting in 2026.

How an HSA works

To contribute, you generally must be covered by a high deductible health plan (HDHP) on the first day of the month, have no other disqualifying health coverage, not be enrolled in Medicare and not be claimed as someone else's dependent. Each spouse who qualifies opens a separate account. Contributions can come from you, your employer, or others, and must be in cash.

The employer and employee contributions count toward the same limit. You deduct your own contributions on Form 8889, even if you do not itemize. Once you enroll in Medicare, your contribution limit is zero starting with the first month of coverage, including when Medicare is applied for retroactively.

You can also deduct HSA contributions made by April 15 for the prior year. Under the "last-month rule" you may contribute the full-year limit if you are eligible on December 1, but you must stay eligible during a testing period afterward.

Withdrawals

Withdrawals used for qualified medical expenses of you, your spouse or your dependents are tax-free. Other withdrawals are taxable income and may carry an additional 20% tax, with exceptions such as disability, death and age 65. The trustee reports distributions on Form 1099-SA. Keep receipts. You can reimburse yourself years later for an expense incurred after the HSA was opened, if you have the proof.

What changes in 2026

• Telehealth. A plan will not fail to be an HDHP because it covers telehealth and other remote care before the deductible. This is now permanent and applies to plan years beginning after 2024.
• Bronze and catastrophic plans. Starting January 1, 2026, bronze and catastrophic plans offered through an Exchange are treated as HSA-compatible. IRS guidance says they do not have to be bought through an Exchange to qualify for the relief.
• Direct primary care. Starting January 1, 2026, a direct primary care arrangement does not by itself disqualify you from contributing to an HSA, if the fixed periodic fee is at most $150 a month ($300 for arrangements covering more than one person), and HSA funds can pay the fees tax-free. The dollar amounts are adjusted for inflation after 2026.
• Health FSAs. The health flexible spending arrangement salary reduction limit is $3,300 for 2025 and $3,400 for 2026. Carryover of unused amounts is up to $660 and $680 respectively.

Talk to your plan administrator before you assume a particular plan qualifies, because plan design, not only the metal tier, determines HSA eligibility.

The premium tax credit

If you or your family bought health insurance through the Marketplace, you may receive the premium tax credit, either in advance (paid to the insurer each month) or when you file. You must file Form 8962 to reconcile the advance payments with the credit you actually qualify for, using Form 1095-A from the Marketplace. Not filing can put your future assistance at risk.

• 2025 returns. The enhanced credit that eliminated the 400%-of-poverty income cap was still in place for 2025, and repayment of excess advance payments was limited by a cap based on income.
• 2026. According to IRS Publication 505 for 2026, if household income exceeds 400% of the federal poverty line, you are no longer eligible, and there is no limit on repayment of excess advance payments. Because this is an area where Congress often acts, check the latest rules before you pick a plan.
• 2027 and later. Under the law, beginning in 2027 only certain lawfully present noncitizens, such as lawful permanent residents, Cuban and Haitian entrants and certain Compact of Free Association residents, can claim the credit. Holders of other visa types would be affected. See our page for H-1B and visa holders.

Example

Example: Sam, 52, has self-only HDHP coverage all of 2025 and puts $4,300 in an HSA: $2,000 through payroll and $2,300 by direct deposit. He reports all of it on Form 8889 and deducts the $2,300 he paid himself. In 2026 he switches to a bronze Marketplace plan and uses a direct primary care clinic that charges $100 a month. Under the 2026 rules he can keep contributing, up to $4,400, but his plan administrator and a tax professional should confirm that the plan and clinic arrangement meet the definitions.

State differences

Illinois starts from federal adjusted gross income, so an HSA deduction on your federal return carries through. Some states do not follow the federal HSA rules, so check the state before assuming. See our Illinois guide.

How we can help

We can review HSA limits across jobs, prepare Form 8889 and Form 8962, and help you compare plan choices for next year. See tax planning and individual tax preparation, or contact us.

Frequently asked questions

General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.