HSA employee contributions subject to FICA?

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ETadvisor
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HSA employee contributions subject to FICA?

Post by ETadvisor » Sat Dec 01, 2018 10:46 am

Thanks to this board and my DW returning to work (part time), my Mega-Corp employee 401k will be maxed ($18,500) on my last paycheck and both Roth IRAs are already maxed ($11,000) from my January 2018 lump sum contributions. I also get a 7% 401k match.

I did not contribute anything to the Mega-Corp HSA. Employer does fund without any contributions and about $400 is in there now which is not enough to invest. I pay medical bills outside HSA.

In 2019, Employer is contributing more to HSA and I have space equal to $5,000. My "personal" limit for savings which I will strive to make is equal to the 2019 contributions for 401k ($19,000) and both Roth IRAs ($12,000).

I recently learned this but I am not sure if can rely on the source:

"If you contribute to your HSA through a payroll deduction, the money is excluded from both income taxes and FICA taxes. For example, if you contribute $1,000 through payroll deductions, you won't have FICA taxes withheld on that $1,000 and your W-2 will show $1,000 less income."

I am well versed in Bogleheads principle to invest in broad market index funds and cut costs (low fund expenses and minimize taxes) and for simplicity. I am also familiar with the prioritizing investment wiki which if I strictly adhere to places my 2019 contributions, as follows:

401k $14,000
HSA $5,000
Roth IRAs $12,000

My relcutance to contribute to HSA is unknown costs (Optum Bank -although does allow investment in Vanguard funds) and may add more complexity. My 401k has good low ER choices and the Roth IRAs are held with Vanguard. I do not have a taxable investment account. EF is in High-Yield Savings Account. Retirement is 25-30 years.

Questions:
(1) Are the employee HSA contributions subject to FICA? If so, what is tax savings? Federal tax is 12%-22% (Married filing jointly). No state income tax.
(2) Should I contribute ($5,000) to HSA or fully contribute ($19,000) to 401k in 2019? A small portion of the 401k is Roth and I will continue setting a portion to it but more goes to the Traditional 401k. I will not lose the 401k match.

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whodidntante
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Re: HSA employee contributions subject to FICA?

Post by whodidntante » Sat Dec 01, 2018 10:51 am

1) No. You will not need to pay the 7.65% employee portion of the social security and medicare taxes for HSA contributions that are withheld from your pay.
2) If you can't max both, max the HSA. It is the superior tax advantaged account.

Concerns about Optum are pointless. You can transfer the full amount to Fidelity whenever you like, although you payroll deductions and company contribution will likely need to continue going into the account your employer chose. Most employers will not allow you to redirect those contributions elsewhere.

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FrugalInvestor
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Re: HSA employee contributions subject to FICA?

Post by FrugalInvestor » Sat Dec 01, 2018 10:52 am

See here....
https://www.shrm.org/resourcesandtools/ ... efits.aspx

From article....
“I personally believe the best way to make contributions is through payroll deductions,” said Lindgren, citing the resulting tax advantages. Under that approach, contributions are tax-free, avoiding federal and state income taxes and FICA taxes in most states. Additionally, money earned through HSA investments is not taxed and there is no tax on funds withdrawn to pay for qualified medical expenses.
Above bolding is mine.
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pdavi21
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Re: HSA employee contributions subject to FICA?

Post by pdavi21 » Sat Dec 01, 2018 10:55 am

HSAs are FICA exempt only if your employer has a payroll deduction option set up. Otherwise, you will still get hit on FICA (I did).

Some problems with HSAs:
1. You are required to have HDHP
2. You are required to save your receipts for ever (in case of audit).
3. Healthcare may be public by the time you retire, and although many think you will be able to roll it to ROTH IRA, it is uncertain.
4. There may be better options now, but there were few reputable companies with huge fees when I had one (and it was like a bad bank account)

Soon2BXProgrammer
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Re: HSA employee contributions subject to FICA?

Post by Soon2BXProgrammer » Sat Dec 01, 2018 11:01 am

if you aren't over the social security wage base, then yes, you wont get taxed from a social security perspective on your contributions

if you are over the wage base limit, then a different XXXX dollars becomes taxable by social security.

In theory this isn't bad, somewhere there is some analysis done that you really need to think if you want to give up those social security earnings from a AIME which is the main factor to determine your PIA.

It mostly matter where you will plan to be vs the bend points. if you are before the first 2 bend points. some analysis should be done. (one obvious exception to this is if your married and you are the lower earner, and you would never actually collect on your own benefits, then who cares and take the deduction), but if your the high earner and both spouses might claim on your record, then this can become important.

ETadvisor
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Re: HSA employee contributions subject to FICA?

Post by ETadvisor » Sat Dec 01, 2018 11:26 am

pdavi21 wrote:
Sat Dec 01, 2018 10:55 am
HSAs are FICA exempt only if your employer has a payroll deduction option set up. Otherwise, you will still get hit on FICA (I did). Mega-Corp allows you to deduct from payroll similar to 401k and you can change contribution through-out course of year

Some problems with HSAs:
1. You are required to have HDHP Mega-Corp offers this
2. You are required to save your receipts for ever (in case of audit).Complexity I want to avoid
3. Healthcare may be public by the time you retire, and although many think you will be able to roll it to ROTH IRA, it is uncertain. Interesting observation
4. There may be better options now, but there were few reputable companies with huge fees when I had one (and it was like a bad bank account) Cost I want to avoid but another poster stated you can tranfer to Fidelity to off-set costs

pdavi21
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Re: HSA employee contributions subject to FICA?

Post by pdavi21 » Sat Dec 01, 2018 11:35 am

ETadvisor wrote:
Sat Dec 01, 2018 11:26 am
pdavi21 wrote:
Sat Dec 01, 2018 10:55 am
4. There may be better options now, but there were few reputable companies with huge fees when I had one (and it was like a bad bank account) Cost I want to avoid but another poster stated you can tranfer to Fidelity to off-set costs
You may have account mininum fees and closure fees. Mine was $2.50 per month under 5k (subject to 0.5 or lower interest) and $25 to close. Just giving an example. I recommend giving the fees a good read if you haven't.

Soon2BXProgrammer
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Re: HSA employee contributions subject to FICA?

Post by Soon2BXProgrammer » Sat Dec 01, 2018 11:36 am

ETadvisor wrote:
Sat Dec 01, 2018 11:26 am
pdavi21 wrote:
Sat Dec 01, 2018 10:55 am
2. You are required to save your receipts for ever (in case of audit).Complexity I want to avoid
I would argue about this slightly.. if you have your HSA connected to your insurance where your insurance sends the needed high level information about your bills to your HSA and you pay them through that interface, you can pay most of your eligible expenses, and its all mostly sort of documented for you.

and even if you do it a different way. i would argue that its probably under the 3 year rule so its not forever:

https://www.irs.gov/businesses/small-bu ... ep-records

for most people it doesn't make sense to do the save your reciepts forever method and not pay for expenses out of the account, unless you are maxing ever other qualified vehicle, and even then, i think most people should have some taxable accounts/no debt before they deal with the save your receipts and reimburse yourself later approach.

Tdubs
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Re: HSA employee contributions subject to FICA?

Post by Tdubs » Sat Dec 01, 2018 12:09 pm

Soon2BXProgrammer wrote:
Sat Dec 01, 2018 11:36 am
ETadvisor wrote:
Sat Dec 01, 2018 11:26 am
pdavi21 wrote:
Sat Dec 01, 2018 10:55 am
2. You are required to save your receipts for ever (in case of audit).Complexity I want to avoid
I would argue about this slightly.. if you have your HSA connected to your insurance where your insurance sends the needed high level information about your bills to your HSA and you pay them through that interface, you can pay most of your eligible expenses, and its all mostly sort of documented for you.

and even if you do it a different way. i would argue that its probably under the 3 year rule so its not forever:

https://www.irs.gov/businesses/small-bu ... ep-records

for most people it doesn't make sense to do the save your reciepts forever method and not pay for expenses out of the account, unless you are maxing ever other qualified vehicle, and even then, i think most people should have some taxable accounts/no debt before they deal with the save your receipts and reimburse yourself later approach.
As I am signing up for an HSA for the first time in 2019, my wife and I were having this very keep-your-receipts-forever conversation this morning. So I am wondering about your "no debt" comment. Are you saying you would cash out the HSA as you go and pay the mortgage down instead?

Soon2BXProgrammer
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Re: HSA employee contributions subject to FICA?

Post by Soon2BXProgrammer » Sat Dec 01, 2018 12:21 pm

Tdubs wrote:
Sat Dec 01, 2018 12:09 pm
Soon2BXProgrammer wrote:
Sat Dec 01, 2018 11:36 am
for most people it doesn't make sense to do the save your reciepts forever method and not pay for expenses out of the account, unless you are maxing ever other qualified vehicle, and even then, i think most people should have some taxable accounts/no debt before they deal with the save your receipts and reimburse yourself later approach.
As I am signing up for an HSA for the first time in 2019, my wife and I were having this very keep-your-receipts-forever conversation this morning. So I am wondering about your "no debt" comment. Are you saying you would cash out the HSA as you go and pay the mortgage down instead?
i always ask people what would they do with the funds, if they didn't have an HSA. if the answer is pay down the mortgage, then you probably should do that. my assumption, the reason why your looking at this is because you are already investing aggressively, if you have a mortgage and you have bonds.. why are you borrowing money at 4-5% to invest at 2-3%? (note: i think people in general should invest before they pay their mortgage off... but they should be super stock heavy, and maybe 100% stocks if they can stomach it, but again don't let good enough (having bonds so you don't sell when things fall apart), get in the way of ideal

therefore, before dealing with the paperwork/receipt nightmare forever for your HSA, just use it for medical expenses, and use the cash that you would have used, to do whatever is your highest priority for taxable funds. (have 1 year emergency fund, 1-2 years expenses in taxable brokerage as a life buffer, pay off the mortgage, etc).

when you run out of other good options, then fine, start the receipt saving method.

don't let perfect optimization get in the way of good enough.

also, if you save receipts for the HSA method, don't forget if you don't reimburse yourself immediately, your receipts value are shrinking at the rate of inflation (value of a free disbursement), and your account might be growing at the same time. therefore it squeezes the value of the receipts in comparison to the account balance.

Not that it isn't worth doing that method. I personally save my receipts. I have 0 debt, paid off house, plenty of cash for things that happen in life.

AlphaLess
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Re: HSA employee contributions subject to FICA?

Post by AlphaLess » Sat Dec 01, 2018 12:31 pm

This is my opinion only, based on experience:

1. HSA contribs that are DIRECT deductions via payroll withholding are NOT subject to FICA,
2. HSA contribs made from your own bank account into the HSA would be subject to FICA, as those dollars that entered your bank account have already been FICA taxed.

It is unclear which option is more beneficial.

If you are under the *FIRST* bend-point for social security benefit, and you are of old age, e.g., 60+, 65+, then perhaps #2 is better, because those dollars taxed at FICA will also increase your earning record.

I did a calculation and under the first bendpoint, every $1 paid into FICA results in a 40% annuity payment if SS is taken at 70.
Of course, it is a delayed annuity, but if you are 65, it is not delayed that far out.

Well worth it.
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jeffyscott
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Re: HSA employee contributions subject to FICA?

Post by jeffyscott » Sat Dec 01, 2018 1:37 pm

pdavi21 wrote:
Sat Dec 01, 2018 10:55 am
2. You are required to save your receipts for ever (in case of audit).
Not if you, like nearly everyone not on this forum, pay your medical bills with the account as you get them.

This is what I do and then the excess is saved/invested. If used for future medical expenses it will be tax-free, if not it is no worse that a traditional IRA after age 65.

I don't know what the audit limit is, but it is certainly less than forever.

Also, I would guess you are far less likely to get audited over a few thousand dollars in medical expenses per year than if you save them up for 30 or 40 years and then take $50K out of HSA in a single year.
press on, regardless - John C. Bogle

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FrugalInvestor
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Re: HSA employee contributions subject to FICA?

Post by FrugalInvestor » Sat Dec 01, 2018 2:10 pm

jeffyscott wrote:
Sat Dec 01, 2018 1:37 pm
pdavi21 wrote:
Sat Dec 01, 2018 10:55 am
2. You are required to save your receipts for ever (in case of audit).
Not if you, like nearly everyone not on this forum, pay your medical bills with the account as you get them.

This is what I do and then the excess is saved/invested. If used for future medical expenses it will be tax-free, if not it is no worse that a traditional IRA after age 65.

I don't know what the audit limit is, but it is certainly less than forever.

Also, I would guess you are far less likely to get audited over a few thousand dollars in medical expenses per year than if you save them up for 30 or 40 years and then take $50K out of HSA in a single year.
Don't forget that your combined medical/dental/vision bills after you're retired will likely be higher than when you're working....or at least ours are. Although Medicare+supplement or Medicare Advantage typically covers a large percentage of your medical bills you can still pay your deductibles as well as Part B premiums from your HSA. Also, many do not have dental or vision insurance after retirement and these expenses will likely be higher as you get older. You can also use your HSA for your spouse's qualified expenses.

So there's a good chance that even if you waited until retirement to begin spending from your HSA you'll be able to put much if not all of it to good use without dipping into those saved receipts.

Edit: corrected grammar
Last edited by FrugalInvestor on Sat Dec 01, 2018 3:02 pm, edited 1 time in total.
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rojas65
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Re: HSA employee contributions subject to FICA?

Post by rojas65 » Sat Dec 01, 2018 2:13 pm

Some excellent points made above - here are a few more considerations:
- inherited HSAs are tax bombs for non-spouse beneficiaries;
- you cannot contribute to HSAs within 6 months of signing up for Medicare;
- although HSAs cannot be used to pay health insurance premiums they can pay COBRA premiums;
- medicare premiums (but not medical premiums) can be paid by HSA distributions;
- most people incur higher health costs as they age so
may not necessarily need to save receipts from very early years;
- although nonqualified HSA distributions before age 65 are subject to 20% penalty, nonqualified distributions after age 65 are merely treated as traditional IRA distributions.
In summary, HSAs are very powerful tools and can be highly useful for some people but not so much for others. All situations need careful analysis. Good luck!

pdavi21
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Re: HSA employee contributions subject to FICA?

Post by pdavi21 » Sat Dec 01, 2018 2:16 pm

jeffyscott wrote:
Sat Dec 01, 2018 1:37 pm
pdavi21 wrote:
Sat Dec 01, 2018 10:55 am
2. You are required to save your receipts for ever (in case of audit).
I don't know what the audit limit is, but it is certainly less than for ever.
3 years or as long as the HSA is open (whichever is longer).

I think this is because as long as HSA is open, you have to include it in tax return, so when they audit they will check all receipts for ever. For FSA, it's like the account opens and closes every year so they only check that year. I could be wrong though.

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mhadden1
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Re: HSA employee contributions subject to FICA?

Post by mhadden1 » Sat Dec 01, 2018 2:25 pm

ETadvisor wrote:
Sat Dec 01, 2018 11:26 am
pdavi21 wrote:
Sat Dec 01, 2018 10:55 am

2. You are required to save your receipts for ever (in case of audit).Complexity I want to avoid
I have some HSA funds invested in Total Stock Market. I intend to use the money for Medicare premiums and such, in the not-too-distant future. I have receipts saved so that if I needed tax-free money right away, I could get it.

If I had many years to go until Medicare, instead of a few, my thinking might be different. And, I suppose various future events could make my appproach sub-optimal.
Oh I can't, can I? That's what they said to Thomas Edison, mighty inventor, Thomas Lindberg, mighty flyer,and Thomas Shefsky, mighty like a rose.

Soon2BXProgrammer
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Re: HSA employee contributions subject to FICA?

Post by Soon2BXProgrammer » Sat Dec 01, 2018 2:37 pm

pdavi21 wrote:
Sat Dec 01, 2018 2:16 pm
jeffyscott wrote:
Sat Dec 01, 2018 1:37 pm
pdavi21 wrote:
Sat Dec 01, 2018 10:55 am
2. You are required to save your receipts for ever (in case of audit).
I don't know what the audit limit is, but it is certainly less than for ever.
3 years or as long as the HSA is open (whichever is longer).

I think this is because as long as HSA is open, you have to include it in tax return, so when they audit they will check all receipts for ever. For FSA, it's like the account opens and closes every year so they only check that year. I could be wrong though.
i am not sure if i agree with this.. as long as your reimbursing as you go. i would argue 3 previous tax seasons is enough.

if you never reimburse yourself and did it 20 years later, then yes, and you might need to prove you never itemized those medical expenses, or any other coverage...

pdavi21
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Re: HSA employee contributions subject to FICA?

Post by pdavi21 » Sat Dec 01, 2018 2:41 pm

Soon2BXProgrammer wrote:
Sat Dec 01, 2018 2:37 pm
pdavi21 wrote:
Sat Dec 01, 2018 2:16 pm
jeffyscott wrote:
Sat Dec 01, 2018 1:37 pm
pdavi21 wrote:
Sat Dec 01, 2018 10:55 am
2. You are required to save your receipts for ever (in case of audit).
I don't know what the audit limit is, but it is certainly less than for ever.
3 years or as long as the HSA is open (whichever is longer).

I think this is because as long as HSA is open, you have to include it in tax return, so when they audit they will check all receipts for ever. For FSA, it's like the account opens and closes every year so they only check that year. I could be wrong though.
i am not sure if i agree with this.. as long as your reimbursing as you go. i would argue 3 previous tax seasons is enough.

if you never reimburse yourself and did it 20 years later, then yes, and you might need to prove you never itemized those medical expenses, or any other coverage...
This is correct...I was mistaken. I don't understand why they let you do old expenses, but I guess that's a good insurance policy for healthcare going public if you've been maxing HSA.

Tdubs
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Re: HSA employee contributions subject to FICA?

Post by Tdubs » Sat Dec 01, 2018 4:18 pm

rojas65 wrote:
Sat Dec 01, 2018 2:13 pm
Some excellent points made above - here are a few more considerations:
- you cannot contribute to HSAs within 6 months of signing up for Medicare;
Where does it say this? For example, this publication indicates you can contribute right up to the month before you file. No?

https://www.in.gov/spd/files/HSA_HSAand ... e_HSA2.pdf

Soon2BXProgrammer
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Re: HSA employee contributions subject to FICA?

Post by Soon2BXProgrammer » Sat Dec 01, 2018 4:59 pm

Tdubs wrote:
Sat Dec 01, 2018 4:18 pm
rojas65 wrote:
Sat Dec 01, 2018 2:13 pm
Some excellent points made above - here are a few more considerations:
- you cannot contribute to HSAs within 6 months of signing up for Medicare;
Where does it say this? For example, this publication indicates you can contribute right up to the month before you file. No?

https://www.in.gov/spd/files/HSA_HSAand ... e_HSA2.pdf
if you wait to claim medicare because your still working past 65. there is a retroactive 6 months activation of medicare, therefore you aren't eligible for the last 6 months..

Spirit Rider
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Re: HSA employee contributions subject to FICA?

Post by Spirit Rider » Sat Dec 01, 2018 5:46 pm

CMS acknowledges this in the THE OFFICIAL U.S. GOVERNMENT MEDICARE HANDBOOK MEDICARE & YOU booklet

Unfortunately, they screwed up the details so bad as to confuse people and cause them to miss out on months of HSA eligibility, (corrections mine)

Remember, premium-free Part A coverage begins up to 6 months back from the effective date you apply for Medicare (or Social Security/RRB benefits), if done after the age of 65, but no earlier than the first month you were eligible for Medicare. To avoid a tax penalty, if you enroll in Medicare effective after age 65 and 6 months you should stop contributing to your HSA at least 6 months before you apply for Medicare.

Bottom Line:
  • If you enroll in Medicare effective from age 65 to age 65 and 6 months, you are eligible for HSA contributions up to the month before age 65.
  • If you enroll in Medicare effective after age 65 and 6 months, you are only eligible for HSA contributions up to the month 6 months before the effective date.

Turbo29
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Re: HSA employee contributions subject to FICA?

Post by Turbo29 » Sat Dec 01, 2018 5:49 pm

Soon2BXProgrammer wrote:
Sat Dec 01, 2018 11:36 am
ETadvisor wrote:
Sat Dec 01, 2018 11:26 am
pdavi21 wrote:
Sat Dec 01, 2018 10:55 am
2. You are required to save your receipts for ever (in case of audit).Complexity I want to avoid
I would argue about this slightly.. if you have your HSA connected to your insurance where your insurance sends the needed high level information about your bills to your HSA and you pay them through that interface, you can pay most of your eligible expenses, and its all mostly sort of documented for you.

and even if you do it a different way. i would argue that its probably under the 3 year rule so its not forever:

https://www.irs.gov/businesses/small-bu ... ep-records

for most people it doesn't make sense to do the save your reciepts forever method and not pay for expenses out of the account, unless you are maxing ever other qualified vehicle, and even then, i think most people should have some taxable accounts/no debt before they deal with the save your receipts and reimburse yourself later approach.
The one time that I tried to pay a doctor bill using that interface the doctor never got the money. So I had to pay him again and then fight Optum/UHC to get the money back.

Never again.

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teen persuasion
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Re: HSA employee contributions subject to FICA?

Post by teen persuasion » Sat Dec 01, 2018 10:44 pm

I did not contribute anything to the Mega-Corp HSA. Employer does fund without any contributions and about $400 is in there now which is not enough to invest. I pay medical bills outside HSA.
So you pay your medical bills OOP, but DON'T fund your HSA beyond your employer contribution? I understand funding the HSA, investing it, and delaying reimbursement of medical expenses (so that the account has time to grow). I understand reimbursing medical expenses each year from the HSA if you don't have the cash flow to both fund and delay reimbursement (essentially reaping the tax benefit and then running those same $$ thru another tax deferred account like Roth IRA). But if you are going to pay medical expenses OOP without the intent to invest in the HSA, why not at least contribute those $$ to the HSA for the tax break, and reimburse yourself immediately.

I like the HSA contributions thru payroll because they do not appear in Available Income on the FAFSA. Contributions outside of payroll get added back to income (just like retirement contributions do), but payroll contributions are essentially invisible.

Payroll HSA contributions are also useful for increasing EITC, as they reduce both line 7 wage income and AGI (EITC is tested on both).

So tax free going in (better than Roth), tax free growth (better than taxable), tax free coming out (better than traditional 401k and IRAs), increases our financial aid and refundable credits annually (both federal and state). I think it's worth a bit of complexity.

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dogagility
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Re: HSA employee contributions subject to FICA?

Post by dogagility » Sun Dec 02, 2018 6:27 am

My understanding is this.

If a person has a medical expense and an HSA account, that person doesn't need to pay the expense with HSA funds. At this point, there are two options. 1) save the medical expense receipt for later (pre-retirement age) penalty free withdrawal of HSA funds in that amount or 2) don't save the receipt and lose the ability to withdraw funds in this amount penalty free (prior to retirement age).

If the person chooses option 2, the HSA is still an excellent retirement savings vehicle for all of the tax advantaged reasons stated by others in this thread.

Bottom line... the saving medical receipts question should not impact your decision whether or not to invest in an HSA.
Taking "risk" since 1995.

Bacchus01
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Re: HSA employee contributions subject to FICA?

Post by Bacchus01 » Sun Dec 02, 2018 7:31 am

I think people also get caught up around every receipt. I invest in my HSA and pay OOP for all expense. At 45, married with three kids, we surprisingly have very few medical bills. I don’t keep every receipt. I do keep every large bill. So in a year I might have just two or three receipts to file away. That covers probably 70% of our expenses. I don’t bother with every $8 prescription $30 urgent cate receipt ( we have a $30 walk in clinic at work). But when my 17 year old ended up in the emergency room with 5 staples on his head, that one I kept.

Also, Optum is tied to UHC for me. I’ve had UHC with three employers going back more than 10 years. They have all my EOBs on file. I realize that’s not a perfect receipt, but I’d be willing to take an audit with my EOBs and decades worth of Quicken data showing my bank records as proof that it was actually paid.

Remember that at 65 it also converts to basically an IRA at that point so even if you don’t have med bills you can withdraw without penalty and just pay taxes.

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Taj_Mahalo
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Re: HSA employee contributions subject to FICA?

Post by Taj_Mahalo » Sun Dec 02, 2018 9:22 am

The 2019 Self-only HSA contribution limit is $3,500. So I'm assuming your HDHP covers DW/family as well since you mention an amount of $5,000 you can contribute.

The HSA I have through my employer is with Optum, employer pays the account fee. The investment options and expense ratios are reasonable. You may want to look into what the minimum required balance is for investing. With mine, I have to keep $2k in cash and can invest the remaining balance. You can set up a reoccurring investment anytime the cash balance exceeds the $2k (or whatever) threshold.

Like others have mentioned, don't sweat the receipt/record keeping piece....just save the big ones.
Income is not wealth. Wealth is not income. Both are equally as important and either is capable of producing the other.

Bacchus01
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Re: HSA employee contributions subject to FICA?

Post by Bacchus01 » Sun Dec 02, 2018 9:48 am

If there is a tax law that should be changed it is that HSA is only FICA deductible through payroll deduction. I suspect the transaction costs for the employer/administrator go down without it and competitiveness would go up. I’d move to Fidelity (or preferably vanguard) in a heartbeat of it was changed.

deltaneutral83
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Re: HSA employee contributions subject to FICA?

Post by deltaneutral83 » Sun Dec 02, 2018 2:47 pm

ETadvisor wrote:
Sat Dec 01, 2018 11:26 am

Some problems with HSAs:
1. You are required to have HDHP Mega-Corp offers this
2. You are required to save your receipts for ever (in case of audit).Complexity I want to avoidTakes me a few minutes a year to upload receipts to google drive
3. Healthcare may be public by the time you retire, and although many think you will be able to roll it to ROTH IRA, it is uncertain. Interesting observation It acts essentially as a Trad IRA anyhow at 65
4. There may be better options now, but there were few reputable companies with huge fees when I had one (and it was like a bad bank account) Cost I want to avoid but another poster stated you can tranfer to Fidelity to off-set costs Lively solves everything, i'ts $2.50 a month with no minimums and can invest in low cost index funds

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Re: HSA employee contributions subject to FICA?

Post by Spirit Rider » Sun Dec 02, 2018 8:54 pm

Bacchus01 wrote:
Sun Dec 02, 2018 9:48 am
If there is a tax law that should be changed it is that HSA is only FICA deductible through payroll deduction. I suspect the transaction costs for the employer/administrator go down without it and competitiveness would go up. I’d move to Fidelity (or preferably vanguard) in a heartbeat of it was changed.
How exactly do you propose this to be done. What allows all Section 125 deductions (health/dental/vision/disability/life insurance, FSA/HSA contributions, etc...) to be FICA exempt is because you never receive that compensation and your employer pays the premiums, makes the contributions, etc...

Short answer; it isn't ever going to happen,

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Re: HSA employee contributions subject to FICA?

Post by Bacchus01 » Mon Dec 03, 2018 8:03 am

Spirit Rider wrote:
Sun Dec 02, 2018 8:54 pm
Bacchus01 wrote:
Sun Dec 02, 2018 9:48 am
If there is a tax law that should be changed it is that HSA is only FICA deductible through payroll deduction. I suspect the transaction costs for the employer/administrator go down without it and competitiveness would go up. I’d move to Fidelity (or preferably vanguard) in a heartbeat of it was changed.
How exactly do you propose this to be done. What allows all Section 125 deductions (health/dental/vision/disability/life insurance, FSA/HSA contributions, etc...) to be FICA exempt is because you never receive that compensation and your employer pays the premiums, makes the contributions, etc...

Short answer; it isn't ever going to happen,
Seriously? A refund on your tax return. Exactly like what happens if you work two jobs and overpay FICA. You get a return. The method already exists.

lifeisinmirrors
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Re: HSA employee contributions subject to FICA?

Post by lifeisinmirrors » Mon Dec 03, 2018 8:38 am

Looking at just the monetary aspects, HSA is better than anything except the employer matched 401k contributions. The main downside is needing to have yet another account with a different tax status and likely a different provider, to hold a few thousand dollars. In my case it feels like it is taking me forever to even get up to the $2500 mimimum to buy a mutual fund.

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Re: HSA employee contributions subject to FICA?

Post by Spirit Rider » Mon Dec 03, 2018 6:51 pm

Bacchus01 wrote:
Mon Dec 03, 2018 8:03 am
Seriously? A refund on your tax return. Exactly like what happens if you work two jobs and overpay FICA. You get a return. The method already exists.
I accept your premise that it is technically feasible to implement a FICA refund on form 1040, but standby my assessment that it is never going to happen. The Social Security (not FICA) credit is because SS wages from more than one employer were > the maximum wage base.

Decades long tax law has only allowed the FICA exemption when the taxpayer does not receive the compensation. If congress was in the least bit inclined, don't you think that after-tax purchase of insurance (dental, disability, life, etc...) which have a far larger constituency would have received such a FICA credit a long time ago.

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Re: HSA employee contributions subject to FICA?

Post by Nestegg_User » Tue Dec 04, 2018 9:55 pm

deltaneutral83 wrote:
Sun Dec 02, 2018 2:47 pm
ETadvisor wrote:
Sat Dec 01, 2018 11:26 am

Some problems with HSAs:
1. You are required to have HDHP Mega-Corp offers this
2. You are required to save your receipts for ever (in case of audit).Complexity I want to avoidTakes me a few minutes a year to upload receipts to google drive
3. Healthcare may be public by the time you retire, and although many think you will be able to roll it to ROTH IRA, it is uncertain. Interesting observation It acts essentially as a Trad IRA anyhow at 65
4. There may be better options now, but there were few reputable companies with huge fees when I had one (and it was like a bad bank account) Cost I want to avoid but another poster stated you can tranfer to Fidelity to off-set costs Lively solves everything, i'ts $2.50 a month with no minimums and can invest in low cost index funds
That was hard to read

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Re: HSA employee contributions subject to FICA?

Post by UpsetRaptor » Tue Dec 04, 2018 10:19 pm

I personally don’t mind paying the SS component of the FICA tax. Less SS contributions will equate to less SS benefits. It’s like a small down payment for a slightly higher COLA annuity when I’m older.

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Re: HSA employee contributions subject to FICA?

Post by ETadvisor » Tue Dec 04, 2018 10:48 pm

Taj_Mahalo wrote:
Sun Dec 02, 2018 9:22 am
The 2019 Self-only HSA contribution limit is $3,500. So I'm assuming your HDHP covers DW/family as well since you mention an amount of $5,000 you can contribute.

The HSA I have through my employer is with Optum, employer pays the account fee. The investment options and expense ratios are reasonable. You may want to look into what the minimum required balance is for investing. With mine, I have to keep $2k in cash and can invest the remaining balance. You can set up a reoccurring investment anytime the cash balance exceeds the $2k (or whatever) threshold.

Like others have mentioned, don't sweat the receipt/record keeping piece....just save the big ones.
Yes it is the family HSA contribution limit of $7,000 for 2019. Employer contributes up to $2,000 (with some hoops to jump through) and $5,000 is maximum employee contribution. That is great news if employer pays Optum account fee. The minimum balance to invest is $2k and I did not know about reoccurring investment which I would utilize if offered. Great advice and other poster to just save big receipts. I now may be leaning toward the HSA contributions and lowering the 401k contributions for 2019.

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Re: HSA employee contributions subject to FICA?

Post by ETadvisor » Tue Dec 04, 2018 11:04 pm

teen persuasion wrote:
Sat Dec 01, 2018 10:44 pm
I did not contribute anything to the Mega-Corp HSA. Employer does fund without any contributions and about $400 is in there now which is not enough to invest. I pay medical bills outside HSA.
So you pay your medical bills OOP, but DON'T fund your HSA beyond your employer contribution? I understand funding the HSA, investing it, and delaying reimbursement of medical expenses (so that the account has time to grow). I understand reimbursing medical expenses each year from the HSA if you don't have the cash flow to both fund and delay reimbursement (essentially reaping the tax benefit and then running those same $$ thru another tax deferred account like Roth IRA). But if you are going to pay medical expenses OOP without the intent to invest in the HSA, why not at least contribute those $$ to the HSA for the tax break, and reimburse yourself immediately.

I like the HSA contributions thru payroll because they do not appear in Available Income on the FAFSA. Contributions outside of payroll get added back to income (just like retirement contributions do), but payroll contributions are essentially invisible.

Payroll HSA contributions are also useful for increasing EITC, as they reduce both line 7 wage income and AGI (EITC is tested on both).

So tax free going in (better than Roth), tax free growth (better than taxable), tax free coming out (better than traditional 401k and IRAs), increases our financial aid and refundable credits annually (both federal and state). I think it's worth a bit of complexity.
It was just for 2018 that I did not contribute to HSA. In 2017, I did contribute a large amount and used it all to pay 2017 medical expenses (DW and daughter had surgery). I just recently learned about investing the contributions and using it like a supercharged retirement account. My issue is that if I max my 401k and Roth IRAs that is my "personal" savings limit for 2019. In order to also fund HSA, I would need to reduce the 401k or Roth IRAs contributions.

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Re: HSA employee contributions subject to FICA?

Post by Darth Xanadu » Tue Dec 04, 2018 11:26 pm

I don't even save receipts, I simply save my year-end EOBs from my insurance provider, they indicate my family out of pocket cost incurred during the year. It's certainly feasible that this will not be satisfactory to the IRS if they ever came knocking but it's a risk I'm willing to take because as far as I can tell the requirements / guidelines are poorly spelled out and there's a decent chance I will only ever use HSA funds for current expenses once I'm retired (so I won't have to rely on old receipts anyway).
"A courageous teacher, failure is."

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Re: HSA employee contributions subject to FICA?

Post by ETadvisor » Tue Dec 04, 2018 11:28 pm

UpsetRaptor wrote:
Tue Dec 04, 2018 10:19 pm
I personally don’t mind paying the SS component of the FICA tax. Less SS contributions will equate to less SS benefits. It’s like a small down payment for a slightly higher COLA annuity when I’m older.
This is a good point that I did not consider. I also do not want to infringe on my future SS benefits :oops:

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Re: HSA employee contributions subject to FICA?

Post by Bacchus01 » Wed Dec 05, 2018 7:31 am

Spirit Rider wrote:
Mon Dec 03, 2018 6:51 pm
Bacchus01 wrote:
Mon Dec 03, 2018 8:03 am
Seriously? A refund on your tax return. Exactly like what happens if you work two jobs and overpay FICA. You get a return. The method already exists.
I accept your premise that it is technically feasible to implement a FICA refund on form 1040, but standby my assessment that it is never going to happen. The Social Security (not FICA) credit is because SS wages from more than one employer were > the maximum wage base.

Decades long tax law has only allowed the FICA exemption when the taxpayer does not receive the compensation. If congress was in the least bit inclined, don't you think that after-tax purchase of insurance (dental, disability, life, etc...) which have a far larger constituency would have received such a FICA credit a long time ago.
No, because those plans are not part of an approved Section 125 plan. It’s pretty simple.

You can argue it won’t be done, but you were arguing that it can’t be done. Simply not true.

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Re: HSA employee contributions subject to FICA?

Post by Tdubs » Wed Dec 05, 2018 7:46 am

Darth Xanadu wrote:
Tue Dec 04, 2018 11:26 pm
I don't even save receipts, I simply save my year-end EOBs from my insurance provider, they indicate my family out of pocket cost incurred during the year. It's certainly feasible that this will not be satisfactory to the IRS if they ever came knocking but it's a risk I'm willing to take because as far as I can tell the requirements / guidelines are poorly spelled out and there's a decent chance I will only ever use HSA funds for current expenses once I'm retired (so I won't have to rely on old receipts anyway).
Anyone know for sure if the EOBs satisfy the IRS? I'm starting my first HSA in 2019 and if I could do this, it would make life very easy.

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Re: HSA employee contributions subject to FICA?

Post by teen persuasion » Wed Dec 05, 2018 8:06 am

ETadvisor wrote:
Tue Dec 04, 2018 11:04 pm
teen persuasion wrote:
Sat Dec 01, 2018 10:44 pm
I did not contribute anything to the Mega-Corp HSA. Employer does fund without any contributions and about $400 is in there now which is not enough to invest. I pay medical bills outside HSA.
So you pay your medical bills OOP, but DON'T fund your HSA beyond your employer contribution? I understand funding the HSA, investing it, and delaying reimbursement of medical expenses (so that the account has time to grow). I understand reimbursing medical expenses each year from the HSA if you don't have the cash flow to both fund and delay reimbursement (essentially reaping the tax benefit and then running those same $$ thru another tax deferred account like Roth IRA). But if you are going to pay medical expenses OOP without the intent to invest in the HSA, why not at least contribute those $$ to the HSA for the tax break, and reimburse yourself immediately.

I like the HSA contributions thru payroll because they do not appear in Available Income on the FAFSA. Contributions outside of payroll get added back to income (just like retirement contributions do), but payroll contributions are essentially invisible.

Payroll HSA contributions are also useful for increasing EITC, as they reduce both line 7 wage income and AGI (EITC is tested on both).

So tax free going in (better than Roth), tax free growth (better than taxable), tax free coming out (better than traditional 401k and IRAs), increases our financial aid and refundable credits annually (both federal and state). I think it's worth a bit of complexity.
It was just for 2018 that I did not contribute to HSA. In 2017, I did contribute a large amount and used it all to pay 2017 medical expenses (DW and daughter had surgery). I just recently learned about investing the contributions and using it like a supercharged retirement account. My issue is that if I max my 401k and Roth IRAs that is my "personal" savings limit for 2019. In order to also fund HSA, I would need to reduce the 401k or Roth IRAs contributions.
I was in the same position: couldn't max 401k + 2 Roth IRAs + HSA, and originally opted just let DH's employer contribute to HSA while we maxed the others. Someone on another board challenged my thinking, so I ran the math. The 401k saves on federal and state tax for us, and reduces our w2 wages and AGI (important for refundable credits like EITC and the Simplified Needs Test on FAFSA). The HSA does all that, PLUS saves the additional 7.65% FICA, and on the FAFSA HSA contributions are not added back to available income (unlike 401k contributions which are added back). For us, it was clear we should contribute to 401k to the match, max HSA, go back to 401k.

Roth IRAs are a bit different for us - I fund them using our refundable credits. The EITC has a 21% phaseout rate, much higher than our tax bracket. Our state matches EITC at 30%, essentially another 6.3% in phaseout. So at the early contributions, our payback for HSA contributions is 21% + 6.3% + 10% (fed) + 4%(state) + 7.65%(FICA) for a grand total of 48.95%. That in essence frees up more cash flow to contribute more to 401k if we wished. If we have any medical expenses, we could reimburse ourselves from the HSA, again freeing up more cash to contribute to the 401k (I think of it as running the $ thru the HSA for the tax exemption, then running the $ into the 401k, getting twice the tax benefit).

In practice, we have not yet reimbursed ourselves from the HSA, I'm treating it as an invisible emergency fund - invisible from a financial aid standpoint, and from EITC investment income caps. I can always tap it if necessary for already incurred medical expenses that I've paid out of pocket. Otherwise, I'll let it grow and use it judiciously when Roth converting in retirement.

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Re: HSA employee contributions subject to FICA?

Post by grabiner » Thu Dec 06, 2018 12:00 am

teen persuasion wrote:
Wed Dec 05, 2018 8:06 am
Roth IRAs are a bit different for us - I fund them using our refundable credits. The EITC has a 21% phaseout rate, much higher than our tax bracket. Our state matches EITC at 30%, essentially another 6.3% in phaseout. So at the early contributions, our payback for HSA contributions is 21% + 6.3% + 10% (fed) + 4%(state) + 7.65%(FICA) for a grand total of 48.95%.
But except for the FICA, that is also your marginal tax rate on salary. This suggests that you contribute more to the 401(k) at a 41.3% marginal tax rate, rather than to a Roth IRA (unless you are using the Roth IRA as an emergency fund). If I understand the EITC correctly, contributing more to a Traditional IRA instead of the 401(k) won't help with that, as it doesn't reduce your earned income; you would save only 14%.
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teen persuasion
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Re: HSA employee contributions subject to FICA?

Post by teen persuasion » Thu Dec 06, 2018 8:43 am

grabiner wrote:
Thu Dec 06, 2018 12:00 am
teen persuasion wrote:
Wed Dec 05, 2018 8:06 am
Roth IRAs are a bit different for us - I fund them using our refundable credits. The EITC has a 21% phaseout rate, much higher than our tax bracket. Our state matches EITC at 30%, essentially another 6.3% in phaseout. So at the early contributions, our payback for HSA contributions is 21% + 6.3% + 10% (fed) + 4%(state) + 7.65%(FICA) for a grand total of 48.95%.
But except for the FICA, that is also your marginal tax rate on salary. This suggests that you contribute more to the 401(k) at a 41.3% marginal tax rate, rather than to a Roth IRA (unless you are using the Roth IRA as an emergency fund). If I understand the EITC correctly, contributing more to a Traditional IRA instead of the 401(k) won't help with that, as it doesn't reduce your earned income; you would save only 14%.
It's tricky to conceptualize. I think of our contributions in stacks, with Roth IRAs last. HSA and 401k contributions are harder to separate out - some of those $ have a rate of 41.3% (plus 7.65% for HSA), but eventually we reach a point where nonrefundable credits completely eliminate any federal tax owed, so our marginal rate at that point is 31.3%. Some of those credits are fixed in amount, some fluctuate with AGI (Retirement Saver's credit).

The question is when to stop 401k contributions to leave cash for Roth IRAs for balance. Traditional IRAs would only have a 4% influence (state tax only, already reached zero federal tax). When our refunds were essentially = 2 Roth IRAs, it was easy. Now, do we push more to 401k, to increase refunds, but may need to divert that extra cash to spending to make up for low take home pay, shrinking Roth contributions? Do we suspend 401k contributions early, to have enough to max the Roth IRAs, even if we leave some refundable credits on the table? We haven't any taxable accounts, because we are still pushing to max all tax advantaged accounts first. So having Roth accounts, and enough Roth contributions to bridge a 5 year Roth ladder start is even more important to us than BHs with taxable available.

I don't currently have access to a work retirement account, only IRA. It limits my account space (in my name). We think of accounts as joint, but ownership does matter for tax treatment (the state will treat the first $20k of IRA income as nontaxable in retirement, but per person, non transferable). With all traditional in DH's name, we get only $20k tax free space. If we both have traditional, we get $40k tax free space annually. Big difference. I may FINALLY get some type of retirement account at work (details TBD) - I plan to shift our traditional contributions away from DH's 401k to my account, in an attempt to even our balances at least somewhat.

ETA: College financial aid plays into decisions, too. I recently funded my Roth IRA earlier than planned, simply to remove those assets from the picture, as the "protected assets" amount on the FAFSA dropped to ridiculously low levels this year ($13,500 - it was in the $40k range 10 years ago for DD1).

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