HSA and FSA payroll rules for employers in 2026
For 2026, an employer’s HSA contribution is not subject to federal income tax withholding, social security tax, Medicare tax or FUTA tax when it is reasonable to believe the employee can exclude it. The same treatment applies to HSA, health FSA and dependent care FSA salary reductions made through a cafeteria plan within the limits. An employee’s own HSA payroll deduction taken outside a cafeteria plan is included in wages.
Are employer HSA contributions subject to payroll taxes?
An employer’s contribution to an eligible employee’s HSA, including an amount the employee elects to have the employer pay through a cafeteria plan, is not subject to federal income tax withholding, social security tax, Medicare tax or FUTA tax if it is reasonable to believe at the time of payment that the employee can exclude it from income. Publication 15 (2026) states this in section 5, and Publication 15-B (2026) lists HSAs in Table 2-1 as exempt for qualified individuals up to the HSA contribution limits, with eligibility determined monthly.
If it is not reasonable to believe the employee can exclude the contribution, the Instructions for Forms W-2 and W-3 say it is subject to income tax withholding, social security and Medicare taxes and FUTA tax, and it is reported in boxes 1, 3 and 5 and on Form 940. Some states treat these items differently, so check your state tax agency.
How are an employee’s own HSA payroll deductions taxed?
An employee’s HSA contribution taken by payroll deduction outside a cafeteria plan is included in wages and is subject to income tax withholding, social security and Medicare taxes and FUTA tax. Publication 15 (2026) states this in section 5, and the deduction is the employee’s own money withheld from pay, not an employer contribution.
When the employee instead elects the contribution as a salary reduction through a section 125 cafeteria plan, Publication 15 says the amount is not wages and is not subject to employment taxes or withholding. Publication 969 (2025) treats contributions made through a cafeteria plan with the employee’s salary reduction as employer contributions.
Should we make HSA contributions through a cafeteria plan or outside one?
Qualifying employer HSA money is taxed the same way whether it runs through a cafeteria plan or outside one, so the choice turns on how the employee’s own contributions are taxed and whether comparability or nondiscrimination rules apply. Outside a plan, an employee’s payroll deduction is wages, and employer contributions outside a plan must meet the HSA comparability rules or the employer owes an excise tax.
The comparability rules do not apply to HSA contributions made through a section 125 cafeteria plan, but the cafeteria plan nondiscrimination rules still do. Publication 15-B (2026) states both points. Under 26 CFR 54.4980G-5, contributions count as made through the plan when the written cafeteria plan gives employees the right to elect cash or other taxable benefits instead of all or part of the HSA contribution, whether or not an employee actually elects to contribute.
What are the 2026 HSA contribution limits and HDHP requirements?
For 2026, the HSA contribution limit is $4,400 for self-only HDHP coverage and $8,750 for family HDHP coverage under Rev. Proc. 2025-19, and the limit is $1,000 higher for an individual who is age 55 or older. For 2026, a high deductible health plan has an annual deductible of at least $1,700 for self-only coverage or $3,400 for family coverage and an out-of-pocket maximum of no more than $8,500 for self-only or $17,000 for family coverage, under Rev. Proc. 2025-19.
For 2026, that makes a limit of $5,400 for self-only coverage and $9,750 for family coverage for an individual who is 55 or older ($4,400 plus $1,000 and $8,750 plus $1,000). The limit covers contributions from every source, so employer contributions excluded from income, including amounts made through a cafeteria plan, reduce what the individual or anyone else can contribute, as Publication 969 (2025) explains. Under section 223 the limit is figured month by month.
Has the IRS published the HSA limits for 2027?
The IRS has already published the 2027 HSA limits in Rev. Proc. 2026-24 at $4,500 for self-only coverage and $9,000 for family coverage, with an HDHP minimum deductible of $1,750 and $3,500 and an out-of-pocket maximum of $8,700 and $17,400.
Which employees can receive employer HSA contributions?
An employer’s HSA contribution qualifies for the payroll tax exemption, up to the HSA contribution limits, for an employee who is an eligible individual, which Publication 15-B (2026) calls a qualified individual and determines monthly. Publication 969 (2025) says the employee must be covered under an HDHP on the first day of the month, have no other health coverage except what Publication 969 permits, not be enrolled in Medicare, and not be claimable as a dependent on someone else’s tax return.
Publication 969 says that if an employer wants its employees to be able to have HSAs, they must have an HDHP, and it treats employer contributions as the employer’s decision. An employee covered by a general-purpose health FSA or an HRA that pays or reimburses qualified medical expenses cannot generally make contributions to an HSA, and Publication 969 lists exceptions. Beginning with the first month of Medicare enrollment, Publication 969 says the contribution limit is zero.
Partners and S corporation 2% shareholders are not eligible for salary reduction contributions to an HSA, and Publication 15-B treats employer contributions to the HSA of a bona fide partner or 2% shareholder as distributions or guaranteed payments, depending on the facts. It defines a 2% shareholder as someone who owns more than 2 percent of the stock or voting power.
Do we have to contribute the same amount to every employee’s HSA?
An employer that contributes to any employee’s HSA outside a cafeteria plan must make comparable contributions to every comparable participating employee, meaning the same amount or the same percentage of the HDHP deductible for employees in the same category of employment and the same category of coverage, and a failure triggers an excise tax of 35% of the aggregate amount the employer contributed to HSAs for the calendar year. Publication 969 (2025) and 26 CFR 54.4980G-4 state the rule.
Under 26 CFR 54.4980G-3, the categories of employment are current full-time employees (customarily 30 or more hours a week), current part-time employees (customarily fewer than 30 hours a week) and former employees, so an employer cannot treat comparable management and non-management employees differently. Employees with self-only coverage are tested separately from those with family coverage, and testing is for the calendar year.
26 CFR 54.4980G-4 answers no to whether each of the following designs satisfies comparability when made outside a cafeteria plan.
* Matching each employee’s own HSA contribution.
* Adding contributions for employees of a certain age or length of service.
* Adding contributions for employees eligible for the age 55 amount.
* Conditioning contributions on joining a wellness program or health assessment.
Under section 4980G(d), an employer may make larger contributions for a non-highly compensated employee than for a highly compensated one. For 2026, Publication 15-B treats as highly compensated a 5 percent owner at any time during the year or the preceding year, or an employee paid more than $160,000 in the preceding year, and the employer can ignore the pay test for an employee outside the top 20 percent by pay for the preceding year. After-tax amounts an employee asks the employer to deduct and forward to the employee’s HSA are not employer contributions under 26 CFR 54.4980G-2, so comparability does not apply to them.
What is the HSA comparability excise tax and how do we avoid it?
If an employer’s contributions fail comparability, the excise tax is 35 percent of the aggregate amount the employer contributed to HSAs for the calendar year, so every employee’s contribution counts and not only the shortfall. Publication 15-B (2026) states the 35 percent rate, and 26 CFR 54.4980G-1 states the aggregate base.
Hypothetical example. An employer has eight eligible employees with self-only coverage and contributes $2,000 to each of two employees and $1,000 to each of six, a total of $10,000 ($4,000 plus $6,000). If the contributions fail comparability, the excise tax is 35 percent of $10,000, or $3,500.
Making the contributions through a section 125 cafeteria plan takes them outside the comparability rules, provided the written plan gives employees the right to elect cash or other taxable benefits instead of all or part of the HSA contribution (26 CFR 54.4980G-5). An employer does not fail comparability merely because an eligible employee had not established an HSA if it gives timely written notice that it will make comparable contributions to eligible employees who, by the last day of February of the next year, both establish an HSA and notify the employer, and it contributes the comparable amounts plus reasonable interest by April 15 of that next year. The notice is timely if given no earlier than 90 days before the first employer HSA contribution of the year and no later than January 15 of the following year.
An employer cannot recoup a non-comparable contribution from an employee’s HSA, but it can correct by contributing additional comparable amounts, plus reasonable interest, up to April 15 following the calendar year of the failure (26 CFR 54.4980G-4). The excise tax can also be waived in whole or in part for a failure due to reasonable cause and not willful neglect, to the extent payment would be excessive relative to the failure.
What do we do if we contributed too much, or to an employee who was not eligible?
An employer that contributed to an employee who was never an eligible individual, or contributed more than the section 223(b) maximum by mistake, may correct the error and must include any amount not recovered by the end of the taxable year in the employee’s wages. Notice 2008-59, Q&A 23 to 25, which Publication 969 points to, says the employer may at its option ask the financial institution to return the amount, and an amount not recovered by the end of the taxable year must be included as gross income and wages on the employee’s Form W-2 for the year of contribution.
For an eligible employee, an amount at or below the section 223(b) maximum cannot be recouped, and an employer generally cannot recoup contributions made after an employee stops being an eligible individual during the year. Employer contributions to an HSA become the employee’s property, and Publication 15-B says the employer cannot withdraw them.
How do we report HSA contributions on the W-2?
Employers report all employer contributions to an HSA, including amounts an employee elects through a cafeteria plan, in Box 12 of Form W-2 with code W. Publication 15-B (2026) says the employer reports its contributions in box 12 using code W, and the Instructions for Forms W-2 and W-3 include amounts the employee elected through a section 125 cafeteria plan. Qualifying amounts reported with code W are not wages.
A contribution that is not reasonably believed to be excludable is reported in boxes 1, 3 and 5 as well as in box 12 with code W. An employee’s own payroll deduction outside a cafeteria plan is included in Box 1 and Box 3 wages, and the Box 3 instruction says not to include employee HSA contributions made through a cafeteria plan.
How are health FSA and dependent care FSA contributions taxed and reported for payroll?
Health FSA salary reductions and dependent care FSA salary reductions within the limits are not subject to federal income tax withholding or employment taxes, as Publication 969 (2025) and Publication 15 (2026) state, but dependent care benefits are reported in Box 10 of Form W-2 and a health FSA salary reduction has no W-2 box or code.
For a health FSA, the Instructions for Forms W-2 and W-3 mention it only for the salary reduction limit and the correction rule for an employee erroneously allowed to elect more. Publication 15-B (2026), section 2, says excluded benefits in most cases are not reported on Form W-2. Notice 2012-9 says the cost reported under code DD does not include a salary reduction election to a health FSA.
For dependent care, employers report the total dependent care benefits paid or incurred under a dependent care assistance program in Box 10 of Form W-2 and include any amount above the exclusion in boxes 1, 3 and 5. Box 10 includes amounts paid or incurred in a cafeteria plan, including a dependent care FSA, regardless of any employee forfeitures, according to the Instructions for Forms W-2 and W-3.
Hypothetical example. An employee has $7,000 deducted for a dependent care FSA and receives $700 of on-site care from the employer. Box 10 shows $7,700 ($7,000 plus $700). Because the 2026 limit is $7,500, the $200 above it ($7,700 minus $7,500) goes in boxes 1, 3 and 5, with applicable taxes withheld on that $200, as Publication 15-B illustrates.
What is the 2026 health FSA limit, and has the IRS published a 2027 limit?
For 2026, a cafeteria plan may not allow an employee to request health FSA salary reductions above $3,400, according to section 4.15 of Rev. Proc. 2025-32. As of November 2, 2026, the IRS had not published a 2027 health FSA limit.
Publication 15-B (2026) says a cafeteria plan that does not limit health FSA contributions to the dollar limit is not a cafeteria plan, and all benefits under it are includible in the employee’s gross income. The Instructions for Forms W-2 and W-3 say a plan that timely limits salary reduction in writing but erroneously lets an employee elect more remains a cafeteria plan if its terms apply uniformly to all participants, the error is a reasonable mistake and not willful neglect, and the excess salary reduction is paid to the employee and reported as wages on the Form W-2 (or W-2c) for the employee’s tax year in which, or with which, the plan year of correction ends.
What are the health FSA carryover and grace period options?
A health FSA can include a carryover of unused amounts or a grace period, and a plan that adopts the carryover is not permitted to also provide a grace period, as Notice 2013-71 states. For 2026, if the plan permits a carryover, Rev. Proc. 2025-32 sets the maximum carryover amount at $680. Notice 2020-33 sets the maximum carryover for a plan year at 20 percent of the section 125(i) limit for that plan year, and 20 percent of the $3,400 limit for 2026 is $680.
A carryover is the employer’s option. The plan may set a lower maximum or none, the same carryover limit must apply to all participants, and the plan must be amended in writing to adopt it.
A grace period is the other option. Publication 969 (2025) says a plan can provide a grace period of up to 2 1/2 months after the end of the plan year, during which qualified medical expenses can be paid from amounts left from the previous year, and the employer is not permitted to refund any part of the balance. Under section 223, coverage during a grace period by a general-purpose health FSA does not disqualify HSA contributions if the FSA balance at the end of the prior plan year is zero or a qualified HSA distribution equals the remaining balance.
What are the health FSA use-it-or-lose-it and uniform coverage rules?
A health FSA is generally a use-it-or-lose-it plan, so unused amounts above any carryover are forfeited and the employer cannot refund the balance to the employee, as Publication 969 (2025) explains.
Under the uniform coverage rule, Publication 969 (2025) says a participant must be able to receive the maximum amount of reimbursement, the amount elected for the year, at any time during the coverage period, regardless of the amount contributed so far. HSAs are not subject to the uniform coverage rule or to the prohibition on carrying over unused amounts, according to Notice 2004-50, Q&A 57.
What is the 2026 dependent care FSA limit?
For taxable years beginning after December 31, 2025, the dependent care assistance exclusion is $7,500 ($3,750 for a married individual filing a separate return). The figure comes from section 129 as amended by Pub. L. 119-21 section 70404, and Publication 15-B (2026) states it as the annual dependent care FSA limit for the 2026 tax year. The exclusion also cannot exceed the employee’s earned income, or for a married employee the lesser of the employee’s and the spouse’s earned income, and section 129(b) has a special rule for a spouse who is a student or incapable of self-care.
Publication 15-B says an employer may exclude the value of dependent care assistance if it reasonably believes the employee can exclude it. A dependent care assistance program must be a separate written plan of an employer for the exclusive benefit of its employees and meet the section 129(d) requirements, which include no discrimination in favor of highly compensated employees.
What does a cafeteria plan need in its written plan document?
A cafeteria plan is a written plan; an employee who chooses a nontaxable benefit gets the same treatment as if the benefit were provided outside the plan, and an employee who chooses cash or another taxable benefit is subject to all employment taxes. Section 125 and Publication 15-B (2026) require the written plan, and Publication 15 (2026) states the tax treatment in its section 15 chart.
The 2007 proposed regulations, which taxpayers may rely on pending final regulations, say the plan must be adopted and effective on or before the first day of the plan year it relates to, and its terms must apply uniformly to all participants. They also say it must describe each benefit and its coverage period, the participation rules, the election procedures, how employer contributions are made, the maximum elective contributions and the plan year, plus, if the plan has flexible spending arrangements, their added provisions, such as the uniform coverage rule for health FSAs and the use-or-lose rule, and any grace period provisions.
All participants must be employees, and Publication 15-B says not to treat a 2% shareholder of an S corporation as an employee.
When can an employee change a cafeteria plan election mid-year?
A cafeteria plan can let an employee who elects HSA contributions start, stop, increase or decrease the election at any time as long as the change is effective prospectively, and any additional restriction the employer places on HSA elections must apply to all employees, according to Notice 2004-50, Q&A 58 and 59. An HSA election added mid-year does not change or revoke other cafeteria plan coverage, such as a health FSA, except as 26 CFR 1.125-4 permits, which can leave the employee ineligible for the HSA.
For the other benefits in a cafeteria plan, 26 CFR 1.125-4 lets a plan permit mid-year changes, other than to 401(k) elections, only for the events in paragraphs (b) through (g), which are special enrollment rights, changes in status, a judgment, decree or order, Medicare or Medicaid entitlement, significant cost or coverage changes (not available for health FSA elections), and FMLA leave, and section 125 does not require a plan to permit any of these changes.
Does a cafeteria plan need nondiscrimination testing?
A cafeteria plan must meet the section 125 nondiscrimination requirements, and if it favors highly compensated employees as to eligibility, contributions or benefits, or gives more than 25 percent of its nontaxable benefits to key employees, the employer must include in the wages of those employees the value of the taxable benefits they could have selected. Publication 15-B (2026) treats a simple cafeteria plan, open to an employer averaging 100 or fewer employees in either of the 2 preceding years and meeting its eligibility, participation and contribution requirements, as meeting the nondiscrimination requirements. For HSA contributions made through the plan, Publication 15-B says the contributions cannot be greater for higher-paid employees than for lower-paid employees, and contributions that favor lower-paid employees are not prohibited.
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