Setting my HSA

[DrMoneyTails]

I just started my first ever attending job and now I have an HDHP.

I have (almost) decided to set up my account with HSA bank.  I have asked my employer about ways to contribute to an HSA and they have given me two options:

1. I contribute myself, transferring money from my checking account to my HSA custodian; or
2. I give them my HSA information and they deduct from my salary and make the contributions in my name.

What would you guys do? What is better and simpler, and more tax efficient?

Also, since I will only have the HDHP for part of the year (August-December), am I still eligible to make the full contribution?

[jhwkr542]

You can make the full contribution only if you keep the hdhp through all of 2018. Otherwise it's prorated by months. Also, if you contribute to the full limit this year but don't have an hdhp through all of next year, you'll be subject to tax and a penalty. With that in mind, options 1 and 2 are a wash for me. You'll have to adjust your HSA contribution or w-4 accordingly

[The White Coat Investor]

Take option 2, it saves payroll taxes. Sweet that they'll do that. Most of the time they'll only make deposits into their chosen HSA.

[adventure]

Option 2, then option 1 if there is room left.

[jfoxcpacfp]

Congratulations on your new job! Rare for me to disagree with WCI, but HSA contributions deducted from your salary are employee contributions and, therefore, taxable for FICA purposes. The tax treatment is the same as for your 401k/403b contributions. HSA contributions made by the employer are not taxable for FICA, same as for employer retirement contributions.

I'd probably go with option 1 and retain full control of the account unless your employer is going to pony up for part of the contribution.

[spiritrider]

Johanna, WCI is correct on this one.

HSA contributions by payroll deduction are exempt from FICA unlike retirement plan employee deferrals.

[East coast]

I'll back up Johanna here, but with a caveat.

While Johanna is technically right, it is not unusual (common?) for the payroll deduction to be 'recharacterized' as an employer contribution. Thus you are both right!

To the OP, I would just check with HR to confirm how it is handled. Option 2 is likely better.

[East coast]

Q-19. What is the tax treatment of employer contributions to an employee's HSA?

A-19. In the case of an employee who is an eligible individual, employer contributions (provided they are within the limits described in A-12) to the employee's HSA are treated as employer-provided coverage for medical expenses under an accident or health plan and are excludable from the employee's gross income. The employer contributions are not subject to withholding from wages for income tax or subject to the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), or the Railroad Retirement Tax Act. Contributions to an employee's HSA through a cafeteria plan are treated as employer contributions. The employee cannot deduct employer contributions on his or her federal income tax return as HSA contributions or as medical expense deductions under section 213.

[ITEngineer]

I believe both could be right here. Looking at the tax code, if your employer contributes money to your HSA, that money is not subject to FICA taxes, but if you have your wages deducted and put into your HSA, that is subject to FICA taxes (but free from Federal Income Tax).

That said, I'm sure your Employer could reduce your Wages and make an extra contribution for you (now free from FICA taxes) on a fixed schedule.

My employer is switching to an HSA next year (finally!) and I'm trying to get answer to this question. If true, I will of course fund it through payroll deductions. If not, $6900 will be deposited on Jan 2nd....(fully funding it for 2018)

[ITEngineer]

Of course my Google search lead me to a Bogleheads form where.....(wait for it)

WCI was an active poster (2014 timeframe)

He's everywhere. I'm not sure he actually has any ER shifts 

[spiritrider]

DrMoneyTails wrote:

1. I contribute myself, transferring money from my checking account to my HSA custodian; or
2. I give them my HSA information and they deduct from my salary and make the contributions in my name.

After, East cost's two posts and re-reading the two items above, I realized it was the interpretation of item #2 for the differing answers.

• If item #2 refers to employee contributions by payroll deduction under an employer's section 125 plan then the contributions are treated as pre-tax employer contributions and exempt from FICA.


• However, if item #2 is simply payroll direct deposit to the HSA account then it is treated the same as item #1 and is after-tax/after FICA and must be deducted by the employee on their tax return.

I and WCI are assuming the former and Johanna and East cost the latter. The OP needs to clarify which it is.

[DrMoneyTails]

I will have to clarify with my employer about this. I will likely have them do it for me as to automate this and potentially save payroll taxes, and to contribute even before the money hits my checking account.

 

Thanks for the answers!

[PNWskindoc]

I'm in a similar situation as the op, as were switching to a hsa plan next month. So if I understand you correctly, I can contribute $6750 for 2017 and another $6750 starting 1/1/2018?

[jfoxcpacfp]

PNWskindoc wrote:

I’m in a similar situation as the op, as were switching to a hsa plan next month. So if I understand you correctly, I can contribute $6750 for 2017 and another $6750 starting 1/1/2018?

Click to expand...

Under the "Last Month Rule", you can contribute a full year's allowance ($6,750) to your HSA if you have a qualified HDHP as of 12/1/2017. The LMR states, however, that you must remain eligible for an HSA through 12/1/18 (the "testing period") or you will owe penalties.

You can contribute $6,900 to a family HSA in 2018.

[PNWskindoc]

Thanks Johanna!