HSA Tax Deduction 2026: Union City Guide Before Open Enrollment

November is health insurance season. Covered California opens enrollment for 2027 plans on November 1, and many employers in the Bay Area are rolling out their 2027 benefits at the same time. If you choose a high deductible plan, a health savings account (HSA) can turn part of your medical spending into a tax deduction. This HSA tax deduction Union City guide explains the 2026 and 2027 limits, the new federal rules that let more people open an HSA, why California taxes HSAs differently, and what to do before December 31, 2026.

It is written for self-employed professionals, S corporation owners and small employers in Union City, Fremont, Newark, Hayward, San Leandro, Castro Valley and across the Bay Area. The figures come from IRS Publications 969 and 15-B, IRS revenue procedures and notices, the California Franchise Tax Board and the Employment Development Department, and we link to each source so you can read the details yourself.

What an HSA Is and Why It Matters at Year-End

An HSA is a savings account you own that is used to pay current or future qualified medical expenses for you, your spouse and your dependents. IRS Publication 969 lists the main federal benefits:

• You can claim a deduction for contributions you, or someone other than your employer, make to your HSA, even if you do not itemize.
• Contributions made by your employer, including contributions through a cafeteria plan, may be excluded from your gross income.
• Interest and other earnings in the account are tax free while they stay in the HSA.
• Distributions may be tax free when they pay qualified medical expenses.
• The account is portable. It stays with you if you change employers or leave the workforce, and unused amounts carry over from year to year.

Year-end is the right time to look at an HSA for two reasons. First, you can still contribute for 2026, and Publication 969 explains that contributions for a year can be made until the April 15 due date of the following year, so April 15, 2027 for 2026. Second, the health plan you pick during open enrollment this fall decides whether you can contribute at all in 2027.

Who Qualifies for an HSA in 2026

Publication 969 says you are an eligible individual only if you meet all of these requirements:

1. You are covered under a high deductible health plan (HDHP) on the first day of the month.
2. You have no other health coverage, except coverage the IRS permits.
3. You are not enrolled in Medicare.
4. You cannot be claimed as a dependent on someone else’s tax return.

The “no other coverage” rule trips up many families. A general purpose health flexible spending arrangement (FSA) or health reimbursement arrangement (HRA), including one offered through a spouse’s employer, generally disqualifies you. IRS Publication 15-B notes that you can still qualify if you only participate in a limited-purpose FSA or HRA or a post-deductible FSA. Coverage for accidents, disability, dental care, vision care, long-term care, and telehealth and other remote care is also allowed.

There is no income limit for HSA contributions, and Publication 15-B says there is no requirement that the account owner have earned income to contribute.

2026 and 2027 HSA Limits at a Glance

The IRS adjusts HSA and HDHP amounts for inflation each year. The 2026 figures come from Rev. Proc. 2025-19 and the 2027 figures from Rev. Proc. 2026-24.

2026 (for contributions you can still make until April 15, 2027)

• HSA contribution limit: $4,400 for self-only coverage, $8,750 for family coverage.
• HDHP minimum deductible: $1,700 self-only, $3,400 family.
• HDHP maximum out-of-pocket expenses (not premiums): $8,500 self-only, $17,000 family.

2027 (for the plan you choose this open enrollment)

• HSA contribution limit: $4,500 for self-only coverage, $9,000 for family coverage.
• HDHP minimum deductible: $1,750 self-only, $3,500 family.
• HDHP maximum out-of-pocket expenses (not premiums): $8,700 self-only, $17,400 family.

If you are 55 or older at the end of the year, Publication 969 lets you contribute an extra $1,000. The limit covers all contributions from every source, including your employer, and Publication 969 says excess contributions are generally subject to a 6 percent excise tax for each year they stay in the account unless you withdraw them in time.

What the 2025 Budget Law Changed for HSAs

The 2025 federal budget law, P.L. 119-21, made three changes that matter during this open enrollment. The IRS summarized them in IR-2025-119 and explained them in Notice 2026-05:

• Bronze and catastrophic plans. As of January 1, 2026, bronze and catastrophic plans available through an Exchange are treated as HSA-compatible, even if they do not meet the general HDHP definition. Notice 2026-05 clarifies that the plan does not have to be bought through the Exchange to qualify. Before this change, many bronze plans failed the HDHP rules because of their out-of-pocket limits or because they covered some non-preventive care before the deductible.
• Direct primary care. Beginning January 1, 2026, an otherwise eligible individual enrolled in certain direct primary care service arrangements may contribute to an HSA and use HSA funds tax-free to pay the periodic fees. Rev. Proc. 2026-24 says the monthly fee limit for 2027 stays at $150 for one person or $300 for an arrangement covering more than one person.
• Telehealth. An HDHP can cover telehealth and other remote care before the deductible without ending HSA eligibility. The law made this permanent for plan years beginning on or after January 1, 2025.

For self-employed people in Union City and Fremont who buy their own coverage, the bronze plan change is the big one. Covered California said in its July 2026 partner briefing that it will keep its traditional open enrollment period from November 1 through January 31. Review your options on Covered California and confirm with the insurer that the plan you pick is a bronze, catastrophic or HSA-qualified HDHP before you open or fund an account.

California Does Not Recognize HSAs

This is the part many Bay Area residents miss. California does not follow the federal HSA rules, so the tax savings are federal only. The 2025 Instructions for Schedule CA (540) say:

• No state deduction. Federal law allows a deduction for HSA contributions, but “California law does not conform.” The federal HSA deduction is added back on Schedule CA, line 13.
• Employer contributions are taxable. Employer HSA contributions reported on Form W-2, box 12, code W are added to California income on Schedule CA, line 1h.
• Earnings are taxed every year. Interest or other earnings in an HSA “are not treated as tax deferred” and are taxable in the year earned. Gains or losses on investments sold inside an HSA are reported for California as well.

For California payroll, the EDD Information Sheet: Types of Payments (DE 231TP) lists employer HSA contributions, both inside and outside a Section 125 cafeteria plan, as subject to Unemployment Insurance, Employment Training Tax, State Disability Insurance and California personal income tax withholding, and reportable as California PIT wages. Make sure your payroll provider has the HSA deduction codes set up for federal and California treatment separately.

Even with no state break, an HSA can still be worth it for many Bay Area households because the federal deduction, the federal exclusion from Social Security and Medicare tax for employer contributions, and tax-free qualified withdrawals remain. If you invest the HSA, track the annual earnings so they can be reported on your California return.

HSAs for Employers: Payroll, Reporting and Comparability

Offering an HSA contribution can be a low-cost benefit for a small team in Hayward or San Leandro. Publication 15-B explains the federal rules:

• Federal tax treatment. Up to the annual limits, cash contributions to the HSA of a qualified individual are exempt from federal income tax withholding, Social Security tax, Medicare tax and FUTA tax if you reasonably believe the employee can exclude them from income.
• Reporting. Report your contributions, including amounts employees elect to contribute through a cafeteria plan, on Form W-2, box 12, code W.
• Comparability. Contributions made outside a cafeteria plan must be comparable for all employees who have comparable coverage during the same period. Otherwise, there is an excise tax equal to 35 percent of the amount you contributed to all employees’ HSAs. You may contribute more for non-highly compensated employees than for highly compensated employees. For 2026, a highly compensated employee is a 5 percent owner or someone paid more than $160,000 in the preceding year.
• Cafeteria plans. Contributions through a cafeteria plan are not subject to the statutory comparability rules, but cafeteria plan nondiscrimination rules still apply.
• Medicare. No contributions can be made to an individual’s HSA after they enroll in Medicare Part A or Part B.

Publication 969 also describes a year-end notice step. For eligible employees who have not opened an HSA by December 31 or told you they have one, you meet the comparability rules by giving them written notice by January 15 of the following year and contributing comparable amounts, plus reasonable interest, by April 15 for those who open an account and notify you by the last day of February. If you are already preparing W-2s, our year-end payroll checklist for W-2s and 1099s walks through the rest of the January filings.

S Corporation Owners, Partners and the Self-Employed

HSA rules for owners are different from the rules for regular employees:

• Sole proprietors and single-member LLC owners can open their own HSA if they have qualifying HDHP coverage. Publication 969 says a self-employed individual can contribute to their own HSA, and all HSA contributions are reported on Form 8889 filed with the personal Form 1040.
• Partners and 2 percent S corporation shareholders are not eligible for salary reduction (pre-tax) HSA contributions, according to Publication 15-B. Employer contributions for a bona fide partner or 2 percent shareholder are treated as distributions or guaranteed payments, depending on the facts.
• S corporation owner-employees. Publication 969 says S corporation contributions to a 2 percent shareholder-employee’s HSA for services are deductible by the S corporation and included in the owner’s gross income. The owner can then deduct the contribution on their own return if they are an eligible individual.

For S corporation owners, this means HSA contributions should be coordinated with the owner’s year-end payroll and health insurance reporting. Our S corp election 2027 guide explains how owner health insurance is reported, and our Solo 401(k) and SEP IRA guide covers the retirement side of year-end planning. If you hire family members, our guide to hiring your children explains the payroll rules.

Deadlines, the Last-Month Rule and Withdrawals

The last-month rule

Publication 969 says that if you are an eligible individual on December 1, you are treated as eligible for the entire year and can contribute the full annual amount for your coverage type. The catch is a testing period: you must stay eligible through December 31 of the following year. If you start HDHP coverage on December 1, 2026 and rely on this rule, you need to keep HSA-eligible coverage through December 31, 2027. If you do not, for reasons other than death or disability, the extra contributions are added to income and are subject to a 10 percent additional tax.

Medicare

Beginning with the first month you are enrolled in Medicare, your contribution limit is zero. Publication 969 warns that this also applies to retroactive Medicare coverage, so if you enroll late and the coverage is backdated, contributions for those months become excess contributions.

Using the money

Keep receipts. Publication 969 says you must keep records showing that distributions were used only for qualified medical expenses that were not paid or reimbursed from another source and were not claimed as an itemized deduction. Distributions for other purposes are taxable and may be subject to an additional 20 percent tax, except after you become disabled, reach age 65 or die.

HSA Tax Deduction Union City Year-End Checklist

1. Confirm you had HSA-eligible coverage and no disqualifying coverage, such as a spouse’s general purpose FSA, for each month of 2026.
2. Add up 2026 contributions from you and your employer and compare them to the $4,400 self-only or $8,750 family limit, plus $1,000 if you are 55 or older.
3. Decide whether to top up your 2026 HSA before April 15, 2027.
4. During open enrollment, check whether your 2027 plan meets the new HDHP limits or is a bronze or catastrophic plan.
5. Stop contributions before the first month of Medicare enrollment.
6. Employers: confirm W-2 box 12, code W amounts and California PIT wage treatment in payroll, and send the January 15 comparability notice if needed.
7. S corporation owners: include owner HSA contributions in the year-end payroll review with health insurance premiums.
8. Track HSA interest, dividends and investment sales for your California return.
9. Save receipts for every HSA distribution.
10. Update your January 15, 2027 estimated payment with our Q4 estimated tax guide.

HSA Tax Deduction Union City FAQs

How much can I put in an HSA for 2026 and 2027?

For 2026, the IRS limit is $4,400 for self-only HDHP coverage and $8,750 for family coverage (Rev. Proc. 2025-19). For 2027, the limits rise to $4,500 and $9,000 (Rev. Proc. 2026-24). If you are 55 or older by the end of the year, you can add a $1,000 catch-up contribution. The limit includes both your contributions and your employer’s contributions.

What is the deadline for 2026 HSA contributions?

IRS Publication 969 explains that contributions for a tax year can be made up to the April 15 due date of the following year, so 2026 contributions can generally be made through April 15, 2027. Employer contributions made between January 1 and April 15 can also be allocated to the prior year if the employer notifies you and the HSA trustee.

Can I open an HSA with a Covered California bronze plan?

Starting January 1, 2026, the 2025 federal budget law treats bronze and catastrophic plans available as individual coverage through an Exchange as HSA-compatible high deductible health plans. IRS Notice 2026-05 adds that the plan does not have to be purchased through the Exchange to qualify. You still have to meet the other eligibility rules, such as having no other disqualifying coverage and not being enrolled in Medicare.

Does California give a tax deduction for HSA contributions?

No. The FTB 2025 Schedule CA (540) instructions say federal law allows a deduction for HSA contributions but California law does not conform. Employer HSA contributions shown on Form W-2, box 12, code W are added back to California income, and interest or other earnings inside an HSA are taxable for California in the year earned.

Can an S corporation owner make pre-tax HSA contributions through payroll?

Not as a salary reduction. IRS Publication 15-B says partners and 2 percent shareholders of an S corporation are not eligible for salary reduction (pre-tax) contributions to an HSA. Publication 969 explains that S corporation contributions to a 2 percent shareholder-employee’s HSA are included in the owner’s gross income, and the owner can then deduct the contribution on their own return if they are an eligible individual.

What happens if I use HSA money for non-medical costs?

IRS Publication 969 says distributions that are not used for qualified medical expenses are included in income and may be subject to an additional 20 percent tax. The additional tax does not apply to distributions made after you become disabled, reach age 65 or die, although the distribution is still taxable income if it is not used for qualified medical expenses.

Plan Your HSA and Benefits With Accountico

An HSA works best when it is coordinated with your health plan choice, payroll setup and year-end tax plan. Accountico helps self-employed professionals, S corporation owners and small employers in Union City, Fremont, Newark, Hayward, San Leandro, Castro Valley and across the Bay Area set up HSA payroll deductions correctly, keep federal and California wage reporting straight, and plan 2026 and 2027 contributions alongside retirement savings and estimated taxes. Learn more about our tax strategy and planning, payroll, bookkeeping and tax preparation services, or book a free 30-minute consultation to review your HSA before December 31, 2026.

Accountico Inc
33476 Alvarado Niles Rd, Ste A007, Union City, CA 94587
(510) 400-9341
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Disclaimer: This article is general information based on IRS, Franchise Tax Board, Employment Development Department and Covered California guidance available as of October 30, 2026. It is not tax, legal, insurance or accounting advice for your specific situation. Limits and rules can change, and whether an HSA fits depends on your health plan, entity type and full return. Talk with a qualified tax professional, and with a licensed insurance agent or your plan administrator about plan eligibility, before acting on this information.