This bill revises Internal Revenue Code section 223 to expand HSA eligibility, revise which insurance products qualify as high-deductible health plans (HDHPs), alter contribution mechanics for married couples, and clarify a handful of technical treatment rules (mental-health carveouts, retroactive expense treatment, IHS users, veterans, and long-term care distributions). The changes are focused on widening access to HSA tax benefits and aligning contribution limits with plan cost-sharing metrics rather than fixed dollar caps.
For stakeholders — plan sponsors, HSA custodians, insurers, and tax/compliance officers — the bill raises immediate design and operational questions: which products qualify as HDHPs, how to implement new contribution limits tied to deductible and out-of-pocket amounts, how to track and permit spouse catch-up contributions to the same account, and how retroactive expense treatment and safe harbors will be administered. The statutory changes will require new IRS guidance and plan-document updates before the effective dates specified in the bill.
At a Glance
What It Does
The bill amends IRC §223 to expand who counts as an eligible HSA individual, to treat certain ACA bronze and catastrophic plans as HDHPs, to set maximum HSA contributions based on a plan's deductible and out-of-pocket limits, and to add several operational adjustments (a 60‑day retroactive establishment rule, a mental-health deductible safe harbor, and clarified treatment for long-term care distributions).
Who It Affects
Insurers and employers that offer consumer-directed health plans, HSA custodians and recordkeepers, married couples with family HSA coverage (including catch-up contributors), individuals eligible for Medicare Part A or certain veterans benefits, and American Indians who obtain services through the Indian Health Service.
Why It Matters
The bill expands the population that can access tax-advantaged HSA savings and shifts HSA dollar caps to be responsive to plan cost-sharing, which can materially change tax subsidy levels and plan design. Compliance teams will need to revise plan documents, enrollment systems, and reporting processes; the IRS will need to issue implementing guidance.
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What This Bill Actually Does
The HSA Modernization Act makes a package of targeted amendments to the HSA rules in Internal Revenue Code section 223. Rather than sticking to the old eligibility and fixed-dollar contribution regime, the bill opens HSAs to more people and ties contribution caps to plan cost-sharing figures.
Several provisions are technical fixes that alter how plans and administrators treat certain benefits and expenses.
On eligibility, the bill removes the textual restriction that limited contributions by veterans only when their disability was service-connected, and it explicitly allows individuals who are entitled to Medicare Part A by reason of age to contribute (subject to coordinated rules on penalties and the definition of eligible individuals). Separately, the bill instructs that receiving care through the Indian Health Service or tribal programs does not, by itself, make a person ineligible for an HSA on account of being ‘covered’ under another health plan.The bill broadens the definition of HDHP to include certain Affordable Care Act bronze and catastrophic plans, and creates a narrow safe harbor that tolerates the absence of a deductible for up to $500 of mental-health benefits without disqualifying the plan as an HDHP.
It also changes contribution mechanics: the traditional numeric contribution caps are replaced with amounts tied to the deductible and out-of-pocket limits that apply to the HDHP, and married spouses can divide contribution limits so both spouses who are eligible can make catch-up contributions to the same HSA.Other operational changes: the bill treats an HSA established within 60 days after coverage begins as if it were established on the coverage start date for determining whether pre-account medical expenses are qualified; it clarifies that qualified medical expenses include amounts paid for qualified long-term care services; and it sets clear effective dates for each amendment, most applying to taxable years or plan years beginning after December 31, 2025, with limited exceptions effective on enactment.
The Five Things You Need to Know
Section 2 deletes the phrase limiting veteran contributors to those with a "service‑connected disability," allowing more veterans who receive certain VA benefits to contribute to HSAs.
Section 3 permits individuals entitled to Medicare Part A by reason of age to contribute to HSAs, while adding coordination language around the penalty for distributions not used for qualified medical expenses.
Section 5 explicitly treats ACA 'bronze' plans and 'catastrophic' plans (see ACA §1302(d)(1)(A) and §1302(e)) as qualifying HDHPs for HSA purposes.
Section 7 creates a 60‑day lookback: if an HSA is established within 60 days after HDHP coverage begins, the account is treated as established on the coverage start date for qualifying pre-account expenses.
Section 9 removes the fixed $2,250/$4,500 statutory contribution figures and instead ties maximum HSA contributions to the deductible and out‑of‑pocket limit amounts referenced elsewhere in §223, changing how caps will be calculated and adjusted.
Section-by-Section Breakdown
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Veterans eligible for certain VA benefits can contribute
This provision strikes the statutory reference that previously limited HSA eligibility for veterans to those with service‑connected disabilities. Practically, that opens HSA eligibility to veterans who receive non‑service‑connected veterans benefits that previously had been read as disqualifying. The change is narrow—it's a textual deletion—but it shifts how veteran status interacts with the 'no other coverage' eligibility rule, so plan administrators and custodians will need to accept new documentation or VA benefit statements as evidence of eligibility.
Medicare Part A entitlement by age allowed to contribute (with penalty coordination)
The bill adds entitlement to hospital insurance under Medicare Part A (by reason of age) to the list of conditions that will not, by itself, disqualify someone from making HSA contributions. The statute also adjusts related provisions to preserve the penalties framework for distributions that are not used for qualified medical expenses, and amends the definition of 'eligible individual' where necessary. This is a policy pivot from the traditional separation between Medicare entitlement and HSA eligibility, and the provision includes conforming edits to avoid unintended forgiveness of distribution penalties.
Indian Health Service care doesn't automatically disqualify
A new subparagraph clarifies that receiving services under Indian Health Service (IHS) or tribal medical care programs does not automatically count as being 'covered under a health plan' for HSA‑eligibility purposes. That prevents an administrative trap in which IHS beneficiaries would be treated as having duplicative coverage and therefore lose HSA eligibility; it places the burden on plan sponsors and custodians to treat IHS access differently from conventional employer or individual health coverage.
Bronze/catastrophic plans treated as HDHPs; $500 mental‑health deductible safe harbor
The Act expands the statutory HDHP definition to include ACA bronze and catastrophic plans, bringing those exchange‑offered options within HSA compatibility. It also creates a targeted safe harbor that allows plans to waive a deductible for up to $500 of mental‑health benefits without losing HDHP status. Together these changes affect plan design decisions and actuarial certification: insurers can offer HDHP‑compatible bronze products, but any mental‑health carveout must respect the $500 ceiling to preserve HSA treatment.
Retroactive qualification for pre‑account expenses (60‑day rule)
If an HSA is opened within 60 days after HDHP coverage starts, the account is treated as established on the coverage start date solely for purposes of determining whether amounts paid before account opening are qualified medical expenses. This procedural fix reduces the timing mismatch that sometimes prevents reimbursement of close-in‑time expenses, but it also creates a new compliance step for custodians to document the eligibility window precisely.
Both spouses may make catch‑up contributions to the same HSA
The statute is rewritten so that married couples with family HSA coverage can split the family contribution limit and, importantly, both spouses who are age‑eligible for catch‑ups may make catch‑up contributions to the same HSA. The provision keeps a division default (equal split) unless spouses agree otherwise, and it clarifies when additional age‑55+ catch-up amounts count toward the divided limit. Administrators will need to accept and reconcile contributions from two different Social Security numbers into a single account and track which portion is the 'additional' catch-up allowed only when both spouses are over 55.
Contribution caps tied to deductible and out‑of‑pocket limits
Instead of statutory flat dollar caps ($2,250/$4,500), the bill replaces those figures with references to the amounts in effect for the plan’s deductible and out‑of‑pocket limits as set elsewhere in the statute. This shifts indexing and increases variability: HSA maximums will fluctuate with plan design limits rather than following a stand‑alone IRS inflation table. Custodians, payroll systems, and IRS reporting will need to change how they calculate allowable contributions for each plan year.
Clarifies HSA distributions for qualified long‑term care services
The bill expressly includes qualified long‑term care services (as defined in IRC §7702B(c)) among qualified medical expenses for HSAs. This is a definitional clarity that removes ambiguity about whether HSA funds can be used tax‑free for LTC services. The provision applies going forward and is explicitly stated not to create any inference about past treatment; custodians should adjust their qualified‑expense checklists and disclosure materials accordingly.
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Explore Healthcare in Codify Search →Who Benefits and Who Bears the Cost
Every bill creates winners and losers. Here's who stands to gain and who bears the cost.
Who Benefits
- Individuals entitled to Medicare Part A by reason of age: They can contribute to HSAs even after Part A entitlement, expanding eligibility to older savers who had been excluded under prior interpretations.
- Veterans receiving VA benefits (non‑service‑connected): Veterans who receive benefits that previously were read as disqualifying can now access HSA tax advantages, increasing retirement and health expense planning options.
- American Indians and tribal members who use IHS services: The IHS carve‑out prevents automatic ineligibility tied to receiving IHS care, preserving HSA access for this population.
- Married couples with family coverage and both spouses age‑eligible for catch‑ups: Both spouses can make catch‑up contributions into the same HSA, simplifying savings for couples approaching retirement.
- Consumers buying ACA bronze or catastrophic plans: Those exchange plans can qualify as HDHPs for HSA purposes, broadening consumer choices for pairing an HSA with lower‑premium plans.
Who Bears the Cost
- Employers and plan sponsors: They must update plan documents, participant communications, and payroll deduction systems to reflect new eligibility rules and contribution limits tied to plan metrics.
- HSA custodians and recordkeepers: Administrators must accept dual‑spouse catch‑up contributions into single accounts, implement retroactive account‑establishment logic, and retool systems to calculate new caps tied to plan deductibles and out‑of‑pocket limits.
- Insurers and ACA exchange issuers: Treating bronze and catastrophic plans as HDHPs may require new product filings or actuarial certifications and could change premium pricing dynamics.
- IRS and Treasury: The changes increase complexity in enforcement and guidance needs, potentially increasing administrative burden and creating short‑term ambiguity pending rulemaking.
- Federal budget / taxpayers: Broader HSA eligibility and higher or variable contribution limits tied to plan design could increase the long‑term revenue cost of the HSA tax preference.
Key Issues
The Core Tension
The central dilemma is access versus design discipline: the bill expands who can access HSA tax benefits to improve savings options and parity, but each expansion weakens the original coupling between high deductibles and tax‑favored HSAs, increasing complexity for administrators and potentially enlarging the long‑term tax subsidy without a clear mechanism to contain moral hazard or revenue loss.
The bill balances expanded access to HSAs against greater administrative complexity and uncertain fiscal outcomes. Tying contribution limits to deductible and out‑of‑pocket figures removes simple, predictable caps and pushes the technical work onto employers, custodians, and the IRS to compute allowable contributions on a per‑plan basis.
That change will complicate payroll deduction logic and tax reporting and could increase taxpayer errors or inadvertent overcontributions.
Allowing Medicare Part A entitlement and more veterans to contribute shifts long‑standing policy that separated Medicare eligibility from HSA tax advantages; it raises practical questions about dual treatment of benefits and exposure to distribution penalties. Including ACA bronze and catastrophic plans as HDHPs may produce unintended design incentives: insurers could structure products to meet HDHP tests while preserving more first‑dollar coverage for services, blurring the policy purpose of HSAs as paired with high‑deductible plans that constrain moral hazard.
Finally, the mental‑health $500 deductible carve‑out is narrow but could be operationally fiddly for benefit coordinators and may prompt litigation or IRS guidance on what counts as 'mental health benefits' within the safe harbor.
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