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Understanding employer HSA contributions
Understanding employer HSA contributions

How are employer contributions reported? And do their contributions count towards the health savings account contribution limit?

Updated over a week ago

Employer contributions & contribution limit

Contributions from anyone, including your employer, count toward the HSA contribution limits. If your employer contributes $1,000 towards your HSA, that's $1,000 of your HSA contribution limit.

Reporting employer contributions

Employer contributions are reported on Form W-2, Box 12, using code W. Generally, employer contributions are excluded from an employee's taxable income.

HSA contributions outside of the payroll

Most people generally contribute pre-tax funds to their HSA via payroll, but you can make a post-tax contribution anytime. At the end of the year, you will receive Tax Form 8889 with the total amount of contributions you can claim on your tax return as tax deductible.

ProTip

One advantage of contributing via payroll (through your employer) is that any contribution made will not be subject to Social Security and FICA taxes – this amounts to a 7.65% savings. If you earn more than $127,200, this benefit won't apply since that is when Social Security and FICA phase out.

Source: IRC Sec. 223(a).

Comparable HSA contributions

Comparable contributions must be made to all eligible employees enrolled in a qualifying HDHP, in the same category of employment (full-time, part-time, former employees, and collectively bargained), and the same category of coverage (self, self +1, self +2, self +3).

An employer must contribute the same dollar amount or percentage amount to everyone in the same category. Additionally, the higher coverage categories can't have a lower contribution amount compared to the lower coverage categories. This means coverage for more than one person must be greater than one individual.

Source: IRC Section 4980G and the regulations thereunder at Treas. Reg. Sec. 54.4980G

Are employer HSA contributions mandatory?

No, but it is a best practice. It also encourages employees to open an HSA and helps them save for future healthcare expenses.

Employer deadline for depositing HSA contributions

Generally, all employee HSA contributions must be "promptly" deposited into their HSA accounts. Prompt depositing means that the contributions can be reasonably segregated from the employer's general assets as of the earliest date, no later than 90 days after the payroll deduction is made.

As a result, employers who fail to promptly transmit participants' HSA contributions may violate the prohibited transaction provisions of section 4975 of the Code. See Code 4975(c)(1)(D) (prohibited transactions include the "transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan").

Can I make contributions outside of my employer?

Yes!

You can make post-tax contributions at any time throughout the year.

At the end of the year, you will receive Tax Form 8889 with the total amount of contributions you can claim on your tax return as tax deductible. One advantage of contributing via payroll (through your employer) is that any contribution made will not be subject to Social Security and FICA taxes – this amounts to a 7.65% savings. If you earn more than $127,200, this benefit won’t apply since that is when Social Security and FICA phase out.

Source: IRC Sec. 223(a).

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