For years, direct primary care carried a strange tax problem. Employees gladly paid a flat monthly fee for a doctor who actually answers the phone, and then the IRS treated that membership as a second health plan that destroyed their HSA eligibility. Congress closed the gap in the One Big Beautiful Bill Act. As of January 1, 2026, the conflict is gone.

Most coverage of this change reads like a victory lap. Pay your membership from your HSA, done. The questions a mid size employer needs answered are harder. Which memberships actually qualify under the new caps? What does the actuarial evidence say DPC does to claims? And does the tax subsidy change the employer math enough to matter?

This article walks the statute, the IRS guidance issued in December, and the Society of Actuaries study that remains the most rigorous look at DPC inside an employer plan. Then it runs the numbers.

What Section 71308 actually changed

The old conflict

A health savings account requires a high deductible health plan and no disqualifying secondary coverage. Until this year, a direct primary care arrangement counted as that secondary coverage. The tax code treated the membership like a second plan paying first dollar benefits, so employees had to choose between the doctor relationship and the HSA. Most chose the HSA. DPC stayed a cash pay product for people outside HDHP coverage, and employers who liked the model could not attach it to their HSA strategy without hurting their own staff.

The new rule comes with caps

Section 71308 of Public Law 119-21, signed July 4, 2025, rewrites that treatment for months beginning after December 31, 2025. A qualifying direct primary care service arrangement no longer counts as disqualifying coverage, and the periodic fee becomes a qualified medical expense that the HSA itself can pay. Notice 2026-05, issued by Treasury and the IRS on December 9, 2025, confirms both halves of that change.

The definition carries a price ceiling. The arrangement qualifies only while the fixed periodic fee stays at or below $150 a month for an individual or $300 a month for a family, with both figures indexed for inflation after 2026. Cross the cap and the entire arrangement flips back to disqualifying coverage. There is no partial credit and no proration.

The same notice moved two other pieces

Notice 2026-05 reaches beyond DPC. It makes permanent the rule letting HDHP members use telehealth before meeting the deductible, effective for plan years beginning in 2025, and it treats bronze and catastrophic exchange plans as HSA compatible from 2026, whether or not they satisfy the usual HDHP definition. Read together, the three changes point one direction. First dollar care is being decoupled from HSA eligibility. An employer can now run a high deductible backbone, telehealth for quick issues, and a DPC membership for ongoing primary care inside a single HSA compatible design. A year ago, that stack was three separate compliance arguments.

The compliance traps in the fine print

The statute defines primary care services partly by what they exclude, and the exclusions are where an employer's diligence happens. A membership that drifts past the definition breaks HSA eligibility for every enrolled employee, so the service schedule deserves a careful read before anyone signs:

  • Procedures that require general anesthesia are not primary care services under the statute.
  • Prescription drugs other than vaccines fall outside the definition.
  • Laboratory services not typically administered in an ambulatory primary care setting are excluded.
  • The fee must be fixed and periodic, and the arrangement cannot bill insurance for the covered services.

A membership that bundles an in house dispensary or advanced imaging can look attractive and still fail the test. Price is not the only screen. The safest arrangements are the plain ones: unlimited primary care visits, same day or next day scheduling, direct communication with the physician, and nothing else on the invoice. Get the screening wrong and the consequences land on employees, not the practice: contributions made while covered by a non qualifying arrangement become excess HSA contributions, which draw a 6 percent excise tax for every year they remain in the account.

What the actuarial data actually shows

Utilization falls, sharply

The Society of Actuaries commissioned Milliman to evaluate DPC inside a real employer plan, tracking members with at least 12 months of continuous enrollment across a two year window. After adjusting for age, gender and health status, members in the DPC option showed 12.6 percent lower overall demand for health care services and 40.5 percent fewer emergency department visits. Both results reached statistical significance. Hospital admissions ran 19.9 percent lower, though the small admission counts kept that figure from significance.

Read that slowly. The largest measured effect is on the emergency department, the most expensive front door in the system. A membership that costs less than a single ER copay changed where care happened.

Costs went up, slightly

Here is the part the marketing decks skip. After adding the membership fee and related plan changes, total nonadministrative plan costs for the employer in the study rose 1.3 percent. The mechanism matters: the plan did not just pay the fee, it also waived the routine and major medical deductibles for enrolled members, a design Milliman valued at roughly $31 per member per month on its own. DPC redirected care away from expensive settings, but the richer wrapper around it consumed the savings. Milliman's own conclusion is a modeling framework rather than a promise: test whether a negotiated fee schedule makes the option cost neutral for your group before projecting savings.

The report's market survey also anchors realistic pricing. Reported adult membership fees ran $65 to $85 a month, with the full reported range stretching from $25 to $125. Nearly the entire market sits comfortably under the new $150 cap, which is precisely why Congress could draw the line there.

Why the 2026 tax change flips the employer math

Before this year, an employee paying a $75 monthly membership paid it with after tax dollars. In the 22 percent federal bracket, adding the 7.65 percent employee share of FICA, that $900 a year required about $1,280 of gross pay to fund. The money was spent twice: once in taxes, once at the doctor's office.

Route the same $900 through a payroll deducted HSA and both taxes disappear. The employee keeps roughly $267 more per year. At the statutory cap of $1,800 a year for an individual, the combined saving reaches about $534. At the $3,600 family cap, about $1,067. These are mechanical figures from the tax code, not projections.

Employers hold the other half of the ledger. HSA contributions made through a cafeteria plan skip the 7.65 percent employer share of FICA as well. Fifty employees paying typical $75 memberships through the HSA route move $45,000 of spending pretax, which trims about $3,443 from the employer's payroll tax bill while making the benefit meaningfully cheaper for staff. The mechanics of employer HSA funding are covered in our guide to employer HSA contributions in 2026, and the coming year's ceilings are in the 2027 HSA limits breakdown.

Now place that subsidy next to the actuarial finding. The 1.3 percent cost increase in the Milliman case study was measured without any tax subsidy, in a plan where the employer simply paid the fee. Let employees fund memberships through pretax HSAs and the effective price of the same fee drops by nearly a third. That is the difference between a benefit that slightly raises cost and one that roughly pays for itself while cutting emergency visits by two fifths. Note also that DPC fees paid from the HSA are distributions, not contributions, so they do not eat into the 2026 contribution limits of $4,400 for self only coverage and $8,750 for family coverage.

A worked example with real numbers

Take a 60 employee firm where 25 staff enroll in a qualifying DPC arrangement at $75 a month, each paying through the HSA by payroll deduction. The annual membership spend is $22,500, all of it pretax.

  • Employee tax savings at the 22 percent bracket plus FICA: about $6,671 across the group, or $267 per enrolled employee per year.
  • Employer FICA savings on the same deductions: about $1,721 per year.
  • If utilization follows the Milliman pattern, the enrolled cohort's emergency department visits run about 40 percent below what their age and health profile would predict.
  • Admissions should trend lower too, but the study could not prove that difference, so no honest projection banks it.

The expectation to set with leadership is simple. Budget the fee as a real cost. Treat any claims reduction as upside. What the 2026 rules guarantee is the tax subsidy, and that subsidy alone closes most of the gap the actuaries measured.

Adding DPC to a 2026 benefits strategy

For employers ready to move, the sequence matters more than the speed:

  1. Screen the membership against the statute first: fee at or below the caps, fixed periodic billing, and no insurance billing for covered services.
  2. Read the service schedule for the three statutory exclusions before signing anything.
  3. Decide the funding route. Employer paid as a plan benefit, employee paid through the HSA, or a split. Each has different payroll and communication consequences.
  4. Pair the arrangement with the HDHP deliberately. DPC now stacks cleanly with HSA compatible high deductible coverage, and bronze and catastrophic exchange plans joined the HSA compatible list in 2026 under the same law.
  5. Write the arrangement into the plan documents and enrollment materials, stating the cap logic plainly so a fee increase in 2027 does not quietly break eligibility.

Employers who treat DPC as an access and retention tool, priced honestly, tend to stay satisfied with it. Employers who buy it as a guaranteed claims cut are buying a version the actuaries did not find. The 2026 rules finally let the tax code carry part of the load, and for many groups that is enough to make a good model pencil.

Fit matters as much as price. Groups with employees spread across rural counties, where primary care appointments can mean weeks of waiting, feel the access gain first. Groups with young, healthy workforces see less claims movement and should weigh the retention value instead. Groups already running a mature self funded arrangement with strong primary care steerage may find DPC duplicates what they built. The model earns its place when it solves an access problem the plan cannot.

Frequently Asked Questions

Is direct primary care HSA eligible in 2026?

Yes. For months beginning after December 31, 2025, enrollment in a qualifying direct primary care service arrangement no longer disqualifies HSA contributions. The arrangement must charge a fixed periodic fee at or below $150 a month for an individual or $300 for a family, and it must provide only primary care services as the statute defines them.

Can I pay my DPC membership fee with my HSA?

Yes. Under Section 71308 of Public Law 119-21, the periodic fee for a qualifying arrangement is a qualified medical expense, so HSA distributions can pay it tax free. The fee counts as a distribution, not a contribution, so paying it does not reduce how much you can contribute for the year.

What is the DPC fee limit for HSA eligibility in 2026?

The fixed periodic fee cannot exceed $150 a month for an arrangement covering one individual, or $300 a month for family coverage. Both amounts are indexed for inflation after 2026. An arrangement priced above the cap is disqualifying coverage in full, not just on the excess.

What makes a DPC arrangement fail the HSA rules?

Three things break qualification: a fee above the monthly caps, services outside the statutory definition of primary care, and billing insurance for covered services. The statutory exclusions cover procedures requiring general anesthesia, prescription drugs other than vaccines, and laboratory services not typically administered in an ambulatory primary care setting.

Is direct primary care considered health insurance?

No. A DPC arrangement is a direct contract between a patient and a primary care practice, with no third party billing. Before 2026 the tax code nonetheless treated it as disqualifying coverage for HSA purposes. Section 71308 carved qualifying arrangements out of that treatment while leaving the model itself outside insurance regulation in most states.

Can an employer pay for employee DPC memberships?

Employers can fund memberships directly as part of the benefits package, and the Milliman case study examined exactly that design. Since 2026 there is a second route: employees can pay qualifying fees themselves through pretax HSA dollars, which cuts the effective cost by roughly the employee's marginal tax rate plus FICA.

Does direct primary care replace health insurance?

No. DPC covers primary care only: routine visits, care coordination, basic labs and direct access to the physician. It does not cover hospital care, surgery, specialist work or most prescriptions. The natural pairing is a high deductible health plan, which is exactly the combination the 2026 law was written to allow alongside an HSA.

Sources

  1. Public Law 119-21, Section 71308, Direct Primary Care Service Arrangements
  2. IRS IR-2025-119, Treasury and IRS issue Notice 2026-05
  3. IRS, One Big Beautiful Bill provisions page
  4. Society of Actuaries and Milliman, Direct Primary Care: Evaluating a New Model of Delivery and Financing
  5. Milliman, What our study says about Direct Primary Care
  6. IRS Revenue Procedure 2025-19, 2026 HSA Contribution Limits
  7. 26 U.S.C. Section 223, Health Savings Accounts

This article is for educational purposes and does not provide tax, legal, or plan administration advice. Employers should confirm how the rules apply to their plan with their administrator, tax advisor, and counsel.