The House of Representatives continues work on a reconciliation bill that would enact significant tax provisions and spending cuts.  The various legislative committees have completed work on the areas of the bill within their jurisdiction, including the Ways and Means Committee, which proposed language that would enact $3.8 trillion in tax cuts over the next ten years.  Over the weekend, the House Budget Committee consolidated the legislation, and the House Bill is now before the Rules Committee, where a managers’ amendment may be considered before it heads to the House floor.  This article is one of a series of articles discussing various proposals in the legislation that touch on tax withholding, reporting, and fringe benefits.

Among other changes, the House Bill would make changes related to health savings accounts or HSAs.

What Is an HSA?

An HSA is a trust or custodial account maintained with a bank or other approved financial institution under which eligible individuals may set aside money on a tax-favorable basis to pay for certain unreimbursed medical expenses. Due to the tax-preferred nature, the current compliance regime imposes many limitations on HSAs, including limitations related to (1) when an individual will be eligible to contribute to an HSA, (2) how an eligible individual may contribute to an HSA, and (3) which expenses may be reimbursed from an HSA on a tax excludible basis. The proposed bill provides guidance and flexibility to taxpayers with respect to each of these limitations.

Changes that Impact an Individual’s Eligibility to Contribute to an HSA

To be eligible to contribute to an HSA, the individual must be enrolled in a high-deductible health plan (“HDHP”) and may not have other non-HDHP health coverage which would apply before the individual has met their deductible under the HDHP (“disqualifying coverage”). In addition, individuals cease to be eligible to contribute to an HSA once they become entitled to Medicare benefits.

The proposed bill would modify, or codify sub-regulatory guidance related to, these limitations as follows:

• Medicare Part A: Sec. 110204 provides that coverage under Medicare Part A would no longer disqualify an individual from contributing to an HSA. However, enrollment in other Medicare Parts would continue to disqualify an individual from contributing to an HSA.
• Direct Primary Care Service Arrangements: Sec. 110205 provides that “direct primary care service arrangements” will not be considered disqualifying coverage. Direct primary care service arrangements are those arrangements under which an individual is provided with medical care consisting solely of primary care services provided by a primary care provider for a fixed periodic fee. The fixed fee may not exceed $150 per month ($300 per month if enrolled in family coverage). Certain services are not considered “primary care services” and may not be provided—these include procedures that require general anesthesia, prescription drugs (other than vaccines), and certain laboratory services.
• On-Site Employer Clinics: Sec. 110207 provides that the receipt of “qualified items or services” at an on-site employer clinic will not be considered disqualifying coverage. Qualified items or services are limited to physical exams, immunizations, drugs or biologicals (other than prescription drugs), treatment for workplace injuries, preventive care for chronic conditions (as outlined in IRS Notice 2019-45), drug testing, and hearing and vision screenings.
• Coverage Under Spouse’s FSA: Sec. 110212 provides that a spouse’s enrollment in a health flexible spending account (“FSA”) will not be considered disqualifying coverage so long as the FSA does not reimburse expenses of the HSA-eligible individual.

Changes that Impact an Individual’s Contributions to an HSA

An eligible individual is limited in how much money they may contribute to an HSA each year. This limit is indexed year to year. An increased limit applies for (a) eligible individuals who are enrolled in family coverage (though there may need to be coordination with a spouse who also contributes to an HSA on how this increased limit is allocated between both spouses’ HSAs), and (b) eligible individuals who will turn age 55 or older by the end of the year.

Amounts are contributed to the HSA in one of two ways – either (a) directly by the eligible individual, who is then entitled to a tax deduction when they file their individual return; or (b) by the eligible individual’s employer on their behalf. Employer contributions may take the form of either pre-tax money withheld from the employee’s compensation or amounts contributed by the employer from its own assets.

The proposed bill would modify how much an eligible individual may contribute to an HSA and the potential sources from which those contributions may be made as follows:

• Allocation of Catch-Ups: Sec. 110209 provides that, if both spouses are eligible to make additional catch-up contributions due to turning age 55 or older during the year, similar to how the family coverage contribution limit operates, the spouses may elect how to allocate such catch-up contributions between their HSAs. In other words, the spouses could elect to allocate their joint catch-up contribution limit to one spouse allowing that spouse’s HSA to receive catch-up contributions on behalf of both spouses.
• Qualified HSA Distributions: Sec. 110210 provides that employers may permit certain employees to transfer their FSA or health reimbursement account (“HRA”) balance to an HSA if the employee becomes covered under an HDHP and has not previously been covered by an HDHP in the prior four years (a “qualified HSA distribution”). Eligible employees enrolled in employee-only coverage may transfer up to the FSA contribution limit under Code § 125(i)(1) – this transfer limit is doubled for employees enrolled in family coverage. However, a qualified HSA distribution may reduce the amount that may otherwise be contributed to the HSA for the year. If the transfer occurs before the end of the year and the employee remains enrolled in the FSA/HRA, the FSA/HRA must be converted into an HSA-compatible FSA/HRA (i.e., limited purpose or post-deductible). The amount of a qualified HSA distribution must be reported on the employee’s Form W-2.
• Increased Limit for Lower-Income Individuals: Sec. 110213 provides that certain individuals whose adjusted gross income is less than $100,000 (for joint filers, $200,000) may contribute additional amounts to their HSA. The additional contribution amount is phased out for individual filers whose adjusted gross income is greater than $75,000 (for joint filers, $150,000).

Changes that Impact Which Expenses Are Eligible to Be Reimbursed from an HSA

Only “qualified medical expenses” may be paid by an HSA on a tax-excludible basis—other expenses may be paid from the HSA, but they are subject to tax and may be subject to an additional 20% tax if the individual is younger than age 65. “Qualified medical expenses” generally include amounts paid for medical care (as defined in Code § 213(d)) and other specified items (e.g., menstrual care products) but only if the amounts are incurred on or after the date the HSA has been established. In general, health insurance premiums are not considered qualified medical expenses, unless the individual is age 65 or older and the premium is for a health insurance policy that is not a Medicare supplemental policy.

The proposed bill would modify these limitations related to expense reimbursement as follows:

• Removal of Certain Age 65 Relief in Response to Medicare Part A Eligibility Expansion: Sec. 110204 provides that (a) the additional 20% tax on nonqualified medical expenses continues to apply to an individual who is age 65 or older if they are still eligible to contribute to the HSA, and (b) health insurance premiums continue to be nonqualified medical expenses in all instances for an individual who is age 65 or older if they are still eligible to contribute to the HSA.
• Primary Care Service Arrangement Fees: Sec. 110205 provides that fees paid for direct primary care service arrangements may be paid by the HSA and are not treated as a payment for insurance.
• Qualified Sports and Fitness Expenses: Sec. 110208 provides that an HSA may reimburse “qualified sports and fitness expenses” up to $500 ($1,000 for families) per year (with a pro-rata limit applying each month). Qualified sports and fitness expenses are those amounts paid “exclusively for the sole purpose of participating in a physical activity” such as certain gym membership fees. The proposed bill also notes a number of expenses that would not qualify, including videos, books, or similar materials; pre-recorded remote or virtual instruction in a physical exercise; and one-on-one personal training.
• Pre-Establishment Expenses: Sec. 110211 provides that, so long as the HSA is established within 60 days of the commencement of an individual’s HDHP coverage, then medical expenses incurred on or after the date the HDHP coverage commences will be considered qualified medical expenses even if incurred before the HSA was established.

Effective Dates

The proposals discussed in this post are generally effective as of January 1, 2026.  However, the ultimate effective date of these items may vary.