Updated October 5, 2026. Quick answer: Yes. California taxes HSA contributions and earnings. The Franchise Tax Board’s Schedule CA (540) instructions say “Federal law allows a deduction for contributions to an HSA account” and then “California law does not conform”, so the federal deduction is added back on line 13, and an employer HSA contribution shown in box 12, code W, of the W-2 is added to income on line 1h. The 2026 federal HSA limits are $4,400 for self-only coverage and $8,750 for family coverage.
California HSA tax treatment at a glance
| Item | What the documents say |
|---|---|
| Contributions | Not recognized: the federal HSA deduction is added back on Schedule CA (540) line 13, and an employer contribution (W-2 box 12, code W) is added on line 1h |
| Earnings | Taxable in the year earned, not tax deferred |
| Distributions | A distribution not used for qualified medical expenses, if included in federal income, is not taxable for California (line 8f); qualified expenses above 7.5% of federal AGI go on the itemized medical line |
| Where it is reported | Schedule CA (540), lines 13, 1h and 8f |
| Federal HSA limits, 2026 | $4,400 self-only; $8,750 family |
| Source | California Franchise Tax Board; IRS Revenue Procedure 2025-19 |
What the California documents say
The 2025 instructions for Schedule CA (540) treat HSAs as something California does not recognize. At line 13, the Health Savings Account Deduction, they say “Federal law allows a deduction for contributions to an HSA account”. The next sentence is “California law does not conform”, and the instruction is to carry the line 13 amount across as an adjustment, which puts the federal deduction back into California income.
For an employer contribution the instructions say to “Enter the amount of any employer HSA contribution from federal Form W-2”, from box 12, code W, on line 1h, column C.
Earnings, distributions and the rest
On earnings, the instructions say “Interest or earnings in an HSA are taxable in the year earned”. Gain or loss from selling investments inside an HSA is listed among the items reported for California.
On distributions, the instructions say that distributions “are not taxable for California purposes” when they were not used for qualified medical expenses and were included in federal income (line 8f, column B). They also say that if you received a tax-free HSA distribution for qualified medical expenses, the qualified expenses above 7.5% of federal AGI go on the itemized deductions medical line.
A worked example at the 2026 family limit
An illustration, not a return: suppose a California resident with family coverage puts the 2026 federal family limit of $8,750 into an HSA. Because California does not recognize HSAs, the whole $8,750 is added back and stays in California taxable income. That is $4,350 more than the self-only limit of $4,400 would have put there. What the added income costs in California tax depends on your bracket and the Franchise Tax Board’s rate schedule, which this page does not state.
What a mover should know
Every figure on this page is California’s own rule. If you moved during the year, or live in one state and work in another, check each state’s page and return, because the documents read here describe only California and none of them settles a part-year or two-state case. The federal side is the same everywhere: see CMG’s 2026 HSA contribution limits page, and state tax on HSA contributions for the other states checked.
What the documents do not say
- The instructions read are for tax year 2025, the newest archived. The Legislature’s statute page for the conformity rule returned no text, so no California Revenue and Taxation Code section is cited.
Common mistakes
- Assuming the federal HSA deduction carries over to the California return; line 13 of Schedule CA says California law does not conform.
- Leaving an employer HSA contribution (W-2 box 12, code W) off line 1h of Schedule CA.
- Assuming the answer for one state applies to another, or that the state answer changes the federal limits.
Related: 2026 HSA contribution limits, state tax on HSA contributions, California retirement taxes, and how California taxes 401(k) and IRA withdrawals.
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Answer againSources
- 2025 Instructions for Schedule CA (540): https://www.ftb.ca.gov/forms/2025/2025-540-ca-instructions.html
- Revenue Procedure 2025-19 (Internal Revenue Service): https://www.irs.gov/pub/irs-drop/rp-25-19.pdf
Sources: the primary documents linked above, read on October 5, 2026. General information, not tax advice. Your own facts decide the outcome, and a tax professional or the state agency itself is the right place to confirm anything consequential.