Open Enrollment: The Benefit Rules That Changed in 2026

Many small businesses hold open enrollment in the fall. For a calendar-year plan, the choices employees make this fall take effect with the first January paycheck. Most stay in place all year unless the employee has a qualifying life event, though HSA contributions can be changed during the year.

Several federal benefit rules changed on January 1, 2026, under the tax law enacted in July 2025, and much of the IRS guidance came out this year. Here is what changed, where California differs, and what we would settle before January.

Dependent care accounts got bigger

The federal limit on tax-free dependent care benefits rose to $7,500 per return in 2026, or $3,750 for a married person filing separately. The limit is not indexed for inflation, so it stays the same for 2027. Your plan document has to allow the higher amount, so if it still says $5,000, update it before the next plan year begins.

Test before you raise the limit. A dependent care plan cannot favor owners and higher-paid employees. If they use it far more than everyone else, the plan can fail federal testing and they can lose the tax break. A bigger limit makes that more likely. In August, the IRS proposed testing regulations that would make one of the main tests easier to pass, and employers may rely on them now.

The dependent care credit also grew for many families in 2026. Every dollar run through the account lowers the expenses that count for the credit. Putting $6,000 or more in the account, or $3,000 with one child, leaves no credit at all. For some lower-income employees, the credit is worth more.

California did not adopt the increase. For state income tax, the exclusion is still $5,000, so benefits above that are California taxable wages. Even the IRS's first 2026 Form W-2 instructions used the old $5,000 figure until a September correction, so check what your payroll system uses for federal and state wages.

HSAs are open to more people

For 2026, the HSA contribution limit is $4,400 for self-only coverage and $8,750 for family coverage. For 2027, the limits are $4,500 and $9,000. People 55 and older can add $1,000.

Three changes widen who can contribute. A plan can cover telehealth before the deductible without costing anyone HSA eligibility, and that rule is now permanent. Starting in 2026, bronze and catastrophic plans offered as individual coverage through the marketplace count as HSA-compatible, even if bought directly from the insurer, as long as the same plan is sold on the marketplace. Employer group plans do not get that treatment and still have to meet the usual deductible rules. And a direct primary care arrangement that covers only primary care and costs no more than $150 a month, or $300 for more than one person, no longer blocks contributions.

For an owner who buys individual marketplace coverage, a bronze plan may now make an HSA possible.

The health FSA limit for 2026 is $3,400, and a plan can let up to $680 carry over. Check whether the IRS has announced the 2027 health FSA limit before you finalize elections.

California still does not recognize HSAs. Employer contributions and pre-tax payroll contributions are California taxable wages, and earnings inside the account are taxed as they are earned.

Two employer credits expanded

For amounts paid after 2025, the employer child care credit is 40 percent of qualified costs, up to $500,000 a year. An eligible small business gets 50 percent, up to $600,000. For 2026, that generally means average annual gross receipts of $32 million or less over the prior five years. The credit now covers care arranged through a third-party intermediary and facilities shared with other employers, which makes it more practical for smaller companies.

The credit for paid family and medical leave is now permanent. Starting in 2026, it can be based on premiums for paid leave insurance, and an employer can choose to cover employees after six months on the job instead of a year. You need a written leave policy, and the IRS issued guidance in August. Leave that California already requires, or that the state pays, now counts toward qualifying for the credit, but not toward the credit amount.

Trump accounts are taking deposits

Trump accounts could begin accepting contributions on July 4, 2026. Treasury deposits $1,000 for each eligible child born from 2025 through 2028 who is a U.S. citizen with a Social Security number, once a parent or guardian makes the election. Contributions from family and employers are limited to $5,000 per child per year.

An employer can contribute up to $2,500 per employee per year, and that amount is excluded from the employee's income. Under proposed regulations issued in August, it is still subject to Social Security, Medicare and federal unemployment taxes. The program needs a written plan that does not favor higher-paid employees, and employees may be able to add their own pay through the cafeteria plan for their children's accounts. Employer contributions go on the W-2 in box 12 with code TA. These employer rules are still proposed, and other Trump account rules are still being written. Employers may rely on the proposed rules now. California does not follow the federal exclusion.

Owners of S corporations

If you own more than 2 percent of an S corporation, the tax rules treat you more like a partner than an employee for most benefits. Our year-end checklist notes that owner health insurance belongs on the W-2, but the rule reaches further. You cannot pay for benefits pre-tax through the company's cafeteria plan, which rules out funding a health or dependent care FSA from your paycheck. HSA money the company contributes for you is taxable income, though you can usually deduct it on your own return. Company-paid group-term life insurance is not tax-free to you. And the proposed Trump account rules do not treat you as an employee.

Getting elections into January payroll

First, confirm that your plan documents match what you are offering. Give employees a short summary of what changed, including the California differences, and a firm election deadline.

After enrollment closes, load the new amounts before the first January payroll. Check per-paycheck amounts against the annual limits. The dependent care limit is per return, so ask employees whether a spouse also uses one. Set California wages correctly for dependent care above $5,000, for HSA contributions, and for any Trump account contributions. If you add Trump account contributions, confirm your payroll provider can report code TA and apply the right payroll taxes.

Book a planning call

If you want to walk through your benefit choices before elections close, book a time with our team at calendly.com/kirkcole/15-minute-meeting.

This article is general information, not tax advice for your situation. Tax rules change, and the right move depends on your facts.