New HSA Rules Create Hidden Tax Traps for Long Island SMBs

The IRS just handed Long Island employers new HSA opportunities that could backfire if not handled properly. New guidance effective January 1, 2026 expands what counts as HSA-eligible coverage and how employees can spend HSA dollars - but with these changes come new compliance landmines that could cost you thousands in penalties.

What Just Changed (And Why Your Payroll Department Should Care)

Two major HSA rule changes took effect this month. First, all Bronze and Catastrophic ACA Exchange plans now qualify as High Deductible Health Plans for HSA purposes - previously, many didn't meet the technical requirements. Second, employees can now use HSA funds tax-free to pay direct primary care membership fees up to $150 monthly for individuals or $300 for families.

For the 47% of Long Island small businesses that offer HSAs, this creates immediate questions: Do your current plan documents reflect these changes? Are employees making contributions to accounts they shouldn't have? Are they spending HSA money on newly-eligible expenses without proper documentation?

The Contribution Limit Increases You're Already Behind On

HSA contribution limits increased January 1st - individual coverage jumped from $4,300 to $4,400, and family coverage rose from $8,550 to $8,750. If your payroll system is still deducting 2025 amounts, your employees are missing out on $100 to $200 in additional tax-free savings. More importantly, if employees are contributing based on old limits when they should be contributing more, they're losing tax benefits they paid for.

Health FSA limits also increased to $3,400 (up from $3,300), with a maximum carryover of $680. The bigger change: Dependent Care FSA limits jumped dramatically to $7,500 - the first increase in four decades. For professional service firms where partners and associates have young children, this represents significant tax savings they're currently leaving on the table.

The Real Cost: When Employees Don't Understand What Changed

Here's the problem most employers miss: these rule changes only help employees who know about them. If your office manager with two kids doesn't realize she can now set aside $7,500 tax-free for daycare instead of $5,000, she's overpaying taxes by $625 to $1,875 annually (depending on her bracket). If your employees don't understand that Bronze plans now work with HSAs, they might choose more expensive coverage unnecessarily.

When employees don't maximize benefits you're providing, they don't appreciate the value. They see a $200 monthly HSA contribution as "nice to have" instead of recognizing it as $2,600 in tax-free money plus investment growth potential. Without proper education, even valuable benefits deliver zero retention value.

The Compliance Headache You Didn't See Coming

The direct primary care change creates new documentation requirements. HSA funds used for DPC memberships need proper substantiation - receipts showing the membership fee and confirmation it doesn't exceed monthly limits. One employee spending $400 monthly on DPC and calling it "HSA-eligible" creates a taxable distribution plus 20% penalty.

For Nassau and Suffolk County medical practices considering offering DPC services alongside traditional insurance, the HSA integration sounds appealing but requires careful plan design. Your HSA plan documents and employee communications must clearly explain what's covered to avoid IRS problems down the road.

What This Means for Your 2026 Benefits Strategy

If you're sponsoring HSAs or FSAs, three immediate actions protect your investment: First, verify your payroll system reflects 2026 contribution limits - employees should receive their full tax benefits. Second, update employee communications about new HSA-eligible expenses, particularly DPC fees. Third, review whether Bronze ACA plans now make sense for employees who previously couldn't access HSA benefits.

For businesses considering adding HSAs, the expanded Bronze plan eligibility creates new opportunities. More employees can now access HSA benefits without requiring the highest-deductible plans, making HSAs viable for more of your workforce.

Don't Let Tax Benefits Become Tax Problems

These HSA changes represent genuine value for employees - but only if implemented correctly. The difference between a $4,400 HSA contribution that reduces taxable income and a contribution that triggers penalties often comes down to proper plan design and employee education.

Benton Oakfield's plan administration service handles HSA compliance updates automatically, ensuring your plan documents reflect current rules and your employees understand how to maximize their benefits without triggering penalties. When employees actually use and appreciate their HSA benefits, your retention investment pays off.

Compliance Note: Benefit plan rules and tax implications vary based on company size and location. This summary is for informational purposes only. Please contact your Benton Oakfield representative to review how these changes impact your specific plan documents.

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