HSA and FICA Taxes

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Birdman10687
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HSA and FICA Taxes

Post by Birdman10687 »

This came up in another thread and it was suggested to me to start a new topic. I have seen it crop up several times in various other threads as well. There seem to be contradictions/confusions regarding how HSA contributions are taxed (whether they are subject to FICA tax, etc). I would love a discussion/insight that would help me get to the bottom of this because I am currently in a place where I am decided whether to use my employer HSA or open my own.

I will copy paste the post I made in the other thread:

Just some of the sources that seem to contradict the wiki:

http://healthsavingsaccount-hsa.com/FAQ.htm
"Tax9 Do HSA contributions reduce FICA taxes? Employer contributions to a HSA account are not wages, and therefore are not subject to wage taxes like FICA. Employees' voluntary contributions to a HSA are wages, and therefore are subject to FICA taxes. Self-employed people are not subject to FICA taxes, but pay a self-employment tax instead. An HSA plan does not help reduce the self employment tax."

http://www.irs.gov/irb/2004-02_IRB/ar09.html
Q-17. What is the tax treatment of an eligible individual's HSA contributions?
A-17. Contributions made by an eligible individual to an HSA (which are subject to the limits described in A-12) are deductible by the eligible individual in determining adjusted gross income (i.e., “above-the-line”). The contributions are deductible whether or not the eligible individual itemizes deductions. However, the individual cannot also deduct the contributions as medical expense deductions under section 213.
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

These above ones don't come out and say you have to pay FICA tax on the contributions, but, like the other source, basically says that if the employer contributes some that is not part of your income so FICA is not applicable but your contributions only reduce your AGI (not your gross income) and so would be subject to FICA tax.


There seems to be a lot of confusion out there on how exactly taxes treat HSA contributions. From what I can tell, a lot depends on the wording used, and has more than semantical implications.

-Some employers, as a benefit of choosing certain health plans, will contribute (i.e. give) you extra money in your HSA. This is comparable to the employer match in your 401k. It is "given" and is not considered wages and thus not part of your gross income. This would not be subject to FICA tax.
-In addition to the money your employers might "give" you, you can have automatic deducations made from your pay-check and deposited into your HSA. These are paycheck deductions that DO reduce your AGI (so are not subject to normal income tax) but are considered part of your gross income and are thus subject to FICA. Think of this the same way 401k paycheck deductions work. They reduce your AGI but are part of your gross income so get taxed at ~7% or whatever.
-From what I have read, some employers will actually REDUCE your wages and instead contribute to an HSA, perhaps as part of a cafeteria plan or other such similar concept. In this case, it is not a paycheck deduction but instead treated more like a "gift". It is part of neither your AGI nor your gross income and thus is not subject to FICA tax.

The key take-away here is that there is an important but subtle difference between HSA contributions made via paycheck deduction and contributions made by an employer in the form of a gift or cafeteria plan style benefit. Paycheck deductions are FICA taxable from what I can tell.

Am I wrong here?
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White Coat Investor
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Re: HSA and FICA Taxes

Post by White Coat Investor »

I'd love to see this clarified with authoritative sources. I was also under the impression that if your employer wrote the check you didn't pay FICA, but if you are self-employed you do. I know, it makes no sense, but I swear I saw that somewhere, perhaps the same place as your first quote. Wish I could cite a source. I'd love to not pay Medicare taxes on my $6450. That's something like $100 in my pocket....
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ZiziPB
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Re: HSA and FICA Taxes

Post by ZiziPB »

I think you are wrong. HSA contributions made through payroll are not FICA taxable. At least mine have not been over the last 4 years. I think the controlling language is the bold and underlined language:

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
ZiziPB
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Re: HSA and FICA Taxes

Post by ZiziPB »

I think this answers it:

http://www.irs.gov/publications/p969/ar ... 1000204045

See this language: Contributions made by your employer are not included in your income. Contributions to an employee's account by an employer using the amount of an employee's salary reduction through a cafeteria plan are treated as employer contributions. Generally, you can claim contributions you made and contributions made by any other person, other than your employer, on your behalf, as an adjustment to income.
asif408
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Re: HSA and FICA Taxes

Post by asif408 »

Birdman10687 wrote: 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

These above ones don't come out and say you have to pay FICA tax on the contributions, but, like the other source, basically says that if the employer contributes some that is not part of your income so FICA is not applicable but your contributions only reduce your AGI (not your gross income) and so would be subject to FICA tax.
Birdman,

My interpretation based on this paragraph is that your contributions through a cafeteria plan are not subject to FICA or income taxes (as they say indirectly, "treated as employer contributions", which based on the preceding sentence are not subject to FICA or income taxes). I think this is the main reason employers do contribute to an HSA: they don't pay FICA or income taxes on their contributions and you don't pay FICA or income taxes on your contributions.

I have calculated the difference in my taxes before I started contributing to the HSA and after through my cafeteria plan, and it looks like my contributions are not subject to the FICA taxes.
Topic Author
Birdman10687
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Re: HSA and FICA Taxes

Post by Birdman10687 »

In response to what most of you guys are saying I agree, if it is done through a cafeteria plan (specific type of plan defined by the IRS--not just a general employee benefit arrangement, that is, not all employers use a cafeteria plan), it would not be subject to FICA tax. However, just because you are making paycheck deductions does not, by definition, make it part of a cafeteria plan. If it was not, it would be subject to FICA, right?
Topic Author
Birdman10687
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Re: HSA and FICA Taxes

Post by Birdman10687 »

A kind forum member pointed me to pub 15 from the IRS, which has this language in it:


"Employee contributions to their HSAs or MSAs through a payroll deduction plan must be included in wages and are subject to social security, Medicare, and FUTA taxes and income tax withholding. However, HSA contributions made under a salary reduction arrangement in a section 125 cafeteria plan are not wages and are not subject to employment taxes or withholding. For more information, see the Instructions for Form 8889, Health Savings Accounts (HSAs)."

So unless it is specifically a cafeteria plan as defined by the IRS, you pay FICA on it. I know that my employer allows me to adjust my contributions at any time which would not fit the bill for a cafeteria plan. For it to be a salary reduction type arrangement, whatever elections you make toward your HSA ($100 a month, $150, whatever) would be fixed the entire year. If they are not fixed, they are not cafeteria, and are thus FICA taxable. At least that is the way I understand it.
NOVACPA
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Re: HSA and FICA Taxes

Post by NOVACPA »

Birdman10687 wrote: So unless it is specifically a cafeteria plan as defined by the IRS, you pay FICA on it. I know that my employer allows me to adjust my contributions at any time which would not fit the bill for a cafeteria plan. For it to be a salary reduction type arrangement, whatever elections you make toward your HSA ($100 a month, $150, whatever) would be fixed the entire year. If they are not fixed, they are not cafeteria, and are thus FICA taxable. At least that is the way I understand it.
My previous employer, a Big 4 accounting firm, allowed me to make changes to the amount of the employee portion of the HSA payroll decution, at will. I would not say that this anecdoteal evidence makes it fact, but I felt comfortable that one of the largest accounting firms in the world knew what they were doing in terms of firm wide payroll.

This is via Ernst & Young's site (which I think validates the cafeteria plan assumption you had:
Payroll tax treatment. An employer’s contribution to an HSA (including an employee’s pretax contributions through a cafeteria plan) is exempt from FITW, FICA and FUTA if it is reasonable to believe at the time of payment that the contribution will be excludable from the employee’s federal taxable income. However, if it is not reasonable to believe at the time of payment that the contribution will be excludable from the employee’s federal taxable income, employer contributions are subject to FIT, FITW, FICA and FUTA. Some states (e.g., California) and localities include HSA contributions in wages subject to income tax and unemployment insurance tax. HSA funds used for nonqualified medical expenses are subject to an additional federal income tax of 20%.
http://payrollperspectivesblog.ey.com/2 ... a-and-hra/
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Re: HSA and FICA Taxes

Post by White Coat Investor »

The incredible unfairness of this to the self-employed seems a bit odd for the tax code. It doesn't seem like it would have been that hard to allow the self-employed to avoid FICA on HSA contributions.
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NOVACPA
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Re: HSA and FICA Taxes

Post by NOVACPA »

Agreed.

Here is some language that seems to be a bit clearer: http://www.nfpbenefitspartners.com/levi ... _Home.aspx
Topic Author
Birdman10687
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Re: HSA and FICA Taxes

Post by Birdman10687 »

NOVACPA wrote:My previous employer, a Big 4 accounting firm, allowed me to make changes to the amount of the employee portion of the HSA payroll decution, at will. I would not say that this anecdoteal evidence makes it fact, but I felt comfortable that one of the largest accounting firms in the world knew what they were doing in terms of firm wide payroll.
Looks like you are right:

"Q2: Is an HSA subject to the rules regarding midyear changes?
A: No, the rules regarding midyear changes do not apply to HSAs. An HSA must permit participants to change elections at least monthly — even if the HSA is provided through the cafeteria plan. However, the change must be prospective."
Spirit Rider
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Re: HSA and FICA Taxes

Post by Spirit Rider »

Birdman10687 wrote:So unless it is specifically a cafeteria plan as defined by the IRS, you pay FICA on it. I know that my employer allows me to adjust my contributions at any time which would not fit the bill for a cafeteria plan. For it to be a salary reduction type arrangement, whatever elections you make toward your HSA ($100 a month, $150, whatever) would be fixed the entire year. If they are not fixed, they are not cafeteria, and are thus FICA taxable. At least that is the way I understand it.
Yes, HSA contributions are not subject to qualifying event restrictions on changes. Employers must allow changes at least monthly. Most allow you to change it at any time, but it may not be reflected for a certain period of time before the next pay period. They are still most definitely exempt from FICA if part of a Section 125 plan. It is extremely rare for a company to offer benefits that are not under a Section 125 plan. Since doing so would make even their costs to not be tax deductible.

P.S. Your post got in before mine.
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