Your employer is not legally required to offer a health savings account, but if he chooses to, he must follow certain tax regulations. The gross taxable income on your payroll statement, or pay stub, is your total compensation that is subject to taxation for the pay period. Whether your HSA reduces the gross taxable income on your payroll statement depends on the type of plan.
An HSA enables you to put a certain amount of your wages into a designated account to pay for future medical expenses on a pretax or after-tax basis. If your employer provides you with Section 125 benefits, also called cafeteria plans, your payment toward those benefits are not subject to federal taxes. As an HSA participant, your employer probably offers the saving account via a modified Section 125 plan that allows you to make contributions on a pretax basis. If so, your HSA contributions are done via payroll deduction. Contributions to your HSA that are not done by payroll deduction are made in after-tax dollars, which allows you to write-off the expense when you file your annual tax returns.
If you make a pretax contribution to your HSA,, it is not subject to federal income tax, Medicare tax or Social Security tax. If you pay on an after-tax basis, your contributions are subject to all of those taxes. However, when you file your tax return, you avoid paying federal income tax, but you are still responsible for Medicare or Social Security taxes. State income tax laws vary; therefore, check with your state revenue agency to know if your HSA funds are state – and, if applicable, local – tax free.
If your HSA is pretax, your taxable income for federal income tax, Medicare tax and Social Security tax is reduced on your payroll statement. Specifically, your employer deducts the benefits from your gross wages before taking taxes out; this process lowers your taxable income. For example, if you earn $2,000 biweekly and contribute $100 biweekly toward your HSA, only a maximum of $1,900 is subject to taxation, depending on what other pretax options you have selected. Your payroll statement would show $1,900 as your wages before deductions. If you contribute to the plan on after-tax basis, the taxable income on your payroll statement would not be reduced.
Your employer is required to give you a W-2 statement by the end of January each year that shows your wages earned and taxes paid for the previous year. Your pretax payroll deductions for HSA are not included in the gross wages section – which is box 1 – of your W-2. This is because box 1 shows your taxable compensation and your pretax contributions are not subject to taxation. In this case, your employer puts the amounts you contributed – and, if applicable, amounts he contributed – in box 12 of your W-2. If you contributed to your HSA in after-tax monies, when you file your federal tax return on Form 1040, you must also fill out and attach Form 8889, which allows you to claim the deduction on line 13.
You may contribute up to only a certain amount to your HSA; the Internal Revenue Service administers those limits. For individuals with self-coverage only, the annual limit in 2012 is $3,100; for individuals with family coverage, the annual limit is $6,250.
Grace Ferguson has been writing professionally since 2009. With 10 years of experience in employee benefits and payroll administration, Ferguson has written extensively on topics relating to employment and finance. A research writer as well, she has been published in The Sage Encyclopedia and Mission Bell Media.