Open Enrollment and Your Taxes: HSA, FSA, and Medicare Decisions That Affect Your Return

The benefits elections you make during open enrollment are not just HR paperwork -- they are tax decisions with consequences that show up on your 1040. An HSA contribution lowers your adjusted gross income. An FSA election locks money into a use-it-or-lose-it account. And enrolling in Medicare permanently ends your ability to contribute to an HSA, even if you're still working and covered by an employer high-deductible plan. Each of these choices interacts with the others, and with your broader tax picture, in ways that a benefits portal doesn't explain.

This guide covers the specific dollar limits, eligibility rules, and planning traps for the 2025 and 2026 tax years so you can make these decisions with your tax return in mind.

## The HSA Triple Tax Advantage

Health Savings Accounts get their reputation from a tax benefit no other account matches: contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are tax-free. That is three layers of tax protection on the same dollar.

Technical detail

IRC Section 223. Contributions are deductible under 223(a), earnings grow tax-free under 223(e)(1), and qualified distributions are excluded from income under 223(f)(1).

To put a number on it: a married couple in the 24% federal bracket who maxes out their family HSA at $8,750 in 2026 saves at least $2,100 in federal income tax on the contribution alone -- before accounting for any state tax savings or the tax-free growth. If that same couple is also paying the 3.8% net investment income tax, the effective benefit is even larger.

Unlike a 401(k) deduction, which only reduces income tax, the HSA deduction also reduces your Modified Adjusted Gross Income (MAGI). That lower MAGI can ripple through your return, potentially reducing the taxable portion of Social Security benefits, lowering exposure to the net investment income tax, and keeping you below IRMAA thresholds for Medicare premiums.

HSA Contribution Limits: 2025 and 2026

The IRS adjusts HSA contribution limits annually for inflation. Here are the current and upcoming caps:

2025 limits:

• Self-only HDHP coverage: $4,300
• Family HDHP coverage: $8,550
• Catch-up contribution (age 55+): additional $1,000

2026 limits:

• Self-only HDHP coverage: $4,400
• Family HDHP coverage: $8,750
• Catch-up contribution (age 55+): additional $1,000

Technical detail

IRS Revenue Procedure 2024-25 (2025 limits); IRS Revenue Procedure 2025-19 (2026 limits). The catch-up contribution amount is statutory and not indexed for inflation.

The catch-up contribution is per person, not per account. If both spouses are 55 or older and each has their own HSA, each can contribute an additional $1,000. However, a married couple sharing one HSA can only add one $1,000 catch-up; the other spouse would need a separate HSA to claim theirs.

The HDHP Requirement

You cannot contribute to an HSA unless you are covered by a High Deductible Health Plan and have no other disqualifying coverage.

Technical detail

IRC Section 223(c)(1). An "eligible individual" must be covered under an HDHP, must not have other health coverage that is not an HDHP (with limited exceptions for dental, vision, and certain preventive care), and must not be enrolled in Medicare.

2025 HDHP minimum deductibles:

• Self-only: $1,650 / Maximum out-of-pocket: $8,300
• Family: $3,300 / Maximum out-of-pocket: $16,600

2026 HDHP minimum deductibles:

• Self-only: $1,700 / Maximum out-of-pocket: $8,500
• Family: $3,400 / Maximum out-of-pocket: $17,000

IRS Revenue Procedure 2024-25 (2025 amounts); IRS Revenue Procedure 2025-19 (2026 amounts).

If your employer offers both a traditional PPO and an HDHP option, the break-even analysis is straightforward but often overlooked. Compare the difference in premiums (the HDHP is almost always cheaper), add the HSA tax savings on your maximum contribution, and weigh that against the higher deductible you'd pay if you actually need significant care. For a healthy individual or couple with an emergency fund, the HDHP-plus-HSA combination frequently wins by $2,000 to $4,000 per year after tax savings -- even if you never touch the HSA balance.

The HSA as a Retirement Vehicle

After age 65, the HSA sheds its medical-expense restriction. You can withdraw funds for any purpose, and those withdrawals are taxed as ordinary income -- the same treatment as a traditional IRA distribution -- but carry no penalty.

Technical detail

IRC Section 223(f)(4)(C). The 20% additional tax on non-qualified distributions does not apply after the account beneficiary attains age 65 or becomes disabled.

This makes the HSA a hybrid: it functions as a tax-free medical account for your entire working life, then converts into a traditional-IRA equivalent at 65. If you can afford to pay medical expenses out of pocket during your working years and let the HSA grow, you build a pool of money that is either tax-free (if used for medical expenses) or tax-deferred (if used for anything else).

There is no Required Minimum Distribution for an HSA. Unlike a traditional IRA or 401(k), no one forces you to withdraw from an HSA at any age. You can leave it invested indefinitely and let it compound -- a feature that makes it arguably a better long-term retirement vehicle than a traditional IRA for someone who already maxes out their 401(k) and Roth IRA.

## Medicare Enrollment Kills HSA Eligibility

This is the single most common trap at the intersection of benefits enrollment and tax planning: once you enroll in any part of Medicare -- Part A, Part B, or Part D -- you are no longer an eligible individual for HSA purposes and cannot contribute.

Technical detail

IRC Section 223(b)(7). "The limitation ... for any month ... shall be zero for the first month such individual is entitled to benefits under title XVIII of the Social Security Act and for each month thereafter."

The timing details matter:

• If you enroll in Medicare Part A at 65 (which is automatic if you are receiving Social Security), your HSA eligibility ends as of the month your Part A coverage begins.
• If you delay Social Security, you can delay Medicare Part A and continue contributing to your HSA -- but you must actively decline Part A during your initial enrollment period.
• Medicare Part A enrollment is retroactive by up to six months. If you sign up for Part A at age 65 and 4 months, Medicare backdates your coverage to your 65th birthday. That means your HSA contributions for those four months were ineligible, and you'll owe taxes and a 6% excise penalty on the excess contributions.
  Technical detail

  IRC Section 4973(a)(5). The excise tax on excess HSA contributions is 6% per year for each year the excess remains in the account.

Planning point for workers over 65: If you are still employed with employer-provided HDHP coverage and want to keep contributing to your HSA, do not apply for Social Security benefits and do not enroll in Medicare Part A. You can enroll in both after you retire without penalty, as long as you do so within your Special Enrollment Period.

## FSA: Use-It-or-Lose-It and the Carryover Option

A Flexible Spending Account lacks the HSA's permanence. The general-purpose Health FSA has a "use-it-or-lose-it" rule: any balance remaining at the end of the plan year is forfeited, unless your employer has adopted one of two relief provisions.

Option 1: Carryover. Your employer can allow you to roll over up to $660 (2025) or $680 (2026) of unused Health FSA funds into the next plan year.

Technical detail

IRS Notice 2013-71, as updated by Revenue Procedure 2024-25 (2025 carryover limit) and Revenue Procedure 2025-32 (2026 carryover limit).

Option 2: Grace period. Your employer can provide a grace period of up to 2 months and 15 days after the plan year ends, during which you can use the prior year's remaining balance.

Employers can offer one of these options, not both. And many employers offer neither, in which case you forfeit every unspent dollar on December 31.

2025 Health FSA maximum salary reduction: $3,300 2026 Health FSA maximum salary reduction: $3,400

IRC Section 125(i), as adjusted annually for inflation.

The practical implication: with an FSA, you should estimate conservatively. Elect only what you are reasonably certain you will spend on eligible expenses. With an HSA, you should elect aggressively -- ideally the maximum -- because unspent funds stay in your account forever.

Dependent Care FSA: The $7,500 Limit

The Dependent Care FSA (DCFSA) is a separate account from the Health FSA, with its own rules. It covers qualifying childcare or dependent care expenses, and contributions reduce your taxable income.

For 2026, the maximum DCFSA contribution is $7,500 per household ($3,750 if married filing separately). This is the first permanent increase since 1986, enacted by the One Big Beautiful Bill Act signed in July 2025.

Technical detail

One Big Beautiful Bill Act of 2025, Section 110401. The prior limit of $5,000 had been unchanged since 1986, except for a temporary increase to $10,500 under the American Rescue Plan Act of 2021.

For 2025 plan years, the limit remains $5,000 (or $2,500 if married filing separately).

Key rules that catch people off guard: the DCFSA has no carryover provision. Unused funds are forfeited at the end of the plan year -- there is no $680 carryover like the Health FSA. Also, the DCFSA interacts with the Child and Dependent Care Tax Credit: every dollar you run through the DCFSA reduces the expenses eligible for the credit. For most families, the DCFSA produces the larger tax benefit, but the math depends on your marginal tax rate and number of dependents.

## IRMAA: The Medicare Surcharge That Punishes Income Spikes

The Income-Related Monthly Adjustment Amount (IRMAA) is a surcharge on Medicare Part B and Part D premiums for beneficiaries with income above certain thresholds. It is calculated based on your Modified Adjusted Gross Income from two years prior -- your 2024 MAGI determines your 2026 premiums. Social Security Act Section 1839(i). IRMAA uses MAGI as reported on the tax return from two years prior.

This two-year lookback creates a delayed-fuse problem. A Roth conversion you execute in 2024 increases your 2024 MAGI, which triggers higher premiums in 2026. A one-time capital gain from selling a home or business in 2024 does the same. And IRMAA thresholds operate as cliffs, not gradual phase-ins: exceeding the threshold by a single dollar moves you into the next bracket for the entire year.

2026 IRMAA Brackets (Based on 2024 MAGI)

Technical detail

CMS: 2026 Medicare Parts B Premiums and Deductibles fact sheet. The top bracket ($500,000 / $750,000) is currently frozen and not indexed for inflation until 2028.

The dollar impact is substantial. A married couple both on Medicare who land in the third bracket ($274,001 -- $342,000) pays $405.80 each per month in Part B premiums -- $9,739.20 per year combined, compared to $4,869.60 at the standard rate. That is an additional $4,869.60 per year for exceeding the threshold.

Income Events That Trigger IRMAA

Because IRMAA uses a two-year lookback and cliff thresholds, these one-time events routinely surprise retirees:

• Roth conversions: Converting $100,000 from a traditional IRA to a Roth adds $100,000 to your MAGI in the conversion year, potentially pushing you into a higher IRMAA bracket two years later.
• Home sales: The capital gain exclusion ($250,000 single / $500,000 married) helps, but gains above that amount count toward MAGI. A couple selling a home with $700,000 of appreciation reports $200,000 in MAGI from the sale alone.
• Severance packages and stock option exercises: A lump-sum payment in your final year of work can inflate MAGI well above your normal retirement income.
• Required Minimum Distributions in a strong market year: If your portfolio grew significantly, your RMD could be larger than expected.

IRMAA Appeals: Form SSA-44

If your income dropped significantly due to a qualifying life-changing event, you can request that the Social Security Administration use a more recent year's income instead of the two-year-old return. You do this by filing Form SSA-44, "Medicare Income-Related Monthly Adjustment Amount -- Life-Changing Event." SSA Form SSA-44.

Qualifying events include: retirement or other work stoppage, reduction in work hours, death of a spouse, divorce, marriage, or loss of income-producing property. A Roth conversion or home sale does not qualify -- those are voluntary income events, not life-changing events under the SSA's definition.

Processing typically takes 30 to 60 days, and any excess premiums already paid will be refunded. This appeal is worth filing immediately if you've retired and your current income is substantially below what your two-year-old tax return shows.

HSA vs. Traditional Plan: A Break-Even Framework

If your employer offers both a traditional plan (PPO or HMO) and an HDHP with HSA eligibility, here is how to compare them:

Step 1: Calculate the premium difference. Most HDHPs cost $50 to $200 less per month in employee premiums than the traditional plan. That is $600 to $2,400 per year back in your pocket before you touch the HSA.

Step 2: Calculate the HSA tax savings. If you contribute $4,400 (2026 self-only maximum) and your combined federal and state marginal rate is 30%, you save $1,320 in taxes. With family coverage at $8,750, the savings rise to $2,625.

Step 3: Estimate your expected medical spending. The HDHP has a higher deductible ($1,700 self-only / $3,400 family in 2026), so you'll pay more out of pocket before insurance kicks in. Subtract your expected additional out-of-pocket costs from the premium savings and tax savings.

Step 4: Factor in employer HSA contributions. Many employers contribute $500 to $1,500 annually to your HSA as an incentive. This is free money that further tilts the math.

For most healthy individuals and families with $3,000+ in savings to cover the higher deductible, the HDHP-plus-HSA comes out ahead even in a year with moderate medical expenses. The breakeven point is typically when your medical costs exceed the HDHP deductible by the amount of your total tax savings plus premium difference -- often somewhere around $5,000 to $8,000 in out-of-pocket spending.

## 2026 Updates: One Big Beautiful Bill Changes

The One Big Beautiful Bill Act, signed July 4, 2025, made several changes relevant to open enrollment decisions for 2026 plan years:

HSA eligibility expansion: Starting in 2026, individuals enrolled in Bronze-level or Catastrophic-level ACA marketplace plans are eligible to open and contribute to HSAs. Previously, only employer-sponsored HDHPs or individual HDHPs meeting specific deductible thresholds qualified. One Big Beautiful Bill Act of 2025, Section 110201.

Direct Primary Care: HSA-eligible individuals can now participate in Direct Primary Care arrangements and pay periodic DPC fees from their HSAs tax-free, provided fees remain below $150/month (individual) or $300/month (family). One Big Beautiful Bill Act of 2025, Section 110203.

Telehealth permanence: The temporary provision allowing pre-deductible telehealth coverage without disqualifying HSA eligibility has been made permanent. Your employer can offer telehealth as a first-dollar benefit alongside an HDHP without jeopardizing your HSA contributions. One Big Beautiful Bill Act of 2025, Section 110202.

Dependent Care FSA increase: As noted above, the DCFSA limit rises to $7,500 from $5,000 for 2026 plan years.

Frequently Asked Questions

Can I contribute to both an HSA and a Health FSA?

Generally, no. A general-purpose Health FSA is considered "other health coverage" that disqualifies you from HSA contributions. However, your employer may offer a Limited Purpose FSA (LP-FSA) that covers only dental and vision expenses. You can pair an LP-FSA with an HSA without losing HSA eligibility.

Technical detail

IRC Section 223(c)(1)(B)(ii). Limited-purpose arrangements covering only permitted coverage (dental, vision, or preventive care) do not disqualify HSA contributions.

I turned 65 mid-year. Do I lose the full year's HSA contribution?

No. HSA eligibility is determined month by month. If you enroll in Medicare Part A effective July 1, you are an eligible individual for January through June and can contribute a prorated amount: 6/12 of the annual limit.

Technical detail

IRC Section 223(b)(2). The contribution limit is reduced proportionally for months the individual is not an eligible individual.

Be precise with your enrollment date, because Medicare Part A can be retroactive by up to six months.

My income spiked in 2024 from a Roth conversion. Can I appeal the 2026 IRMAA surcharge?

Only if you also experienced a qualifying life-changing event (retirement, work stoppage, death of spouse, divorce, marriage, or loss of income-producing property). A Roth conversion alone is a voluntary action and does not qualify for an IRMAA appeal under Form SSA-44. The surcharge will apply for 2026 premiums, and you cannot reduce it retroactively. This is why tax advisors model IRMAA exposure before executing large Roth conversions.

Is there a deadline to contribute to my HSA for the prior tax year?

Yes. You have until the tax filing deadline -- typically April 15 -- to make HSA contributions for the prior year. If you did not maximize your 2025 HSA contribution through payroll deductions, you can make a lump-sum contribution to your HSA before April 15, 2026, and deduct it on your 2025 return.

Technical detail

IRC Section 223(d)(4)(A). Contributions for a taxable year may be made at any time during the year or by the due date for filing the individual's return for that year.

Should I use my HSA funds now or let them grow?

If you can afford to pay medical bills out of pocket, let the HSA grow. There is no time limit on reimbursing yourself from an HSA -- you can pay a medical bill today, save the receipt, and reimburse yourself tax-free from the HSA twenty years from now. This strategy effectively turns the HSA into a tax-free growth account with unlimited flexibility on the withdrawal timeline.

Technical detail

IRS Publication 969. Distributions from an HSA for qualified medical expenses are tax-free regardless of when the expense was incurred, as long as the expense was incurred after the HSA was established.