Category Archives: Reader Question

How tax is deducted from manual HSA contributions

This question was submitted by HSA reader Adam. Send yours in to evan@hsaedge.com

I got a family HDHP medical plan from my employer in July of 2015. Currently, my contribution is directly cut from paycheck and funded to my HSA. At the end of the calendar year 2015, if I am still below the limit for the year, can I contribute the remaining by an ACH bank transfer as long as it is before April 15, 2016? Will the additonal amount be treated as tax deductible? How do I report this additional contribution on the HSA form?

Yes, what you are suggesting is a valid path for funding your account. You are just combining the two methods of how the HSA tax deduction works:

  1. Each pay period, your HSA contribution is pre-tax so you avoid paying income tax on it.
  2. If you make an additional contribution, that will be done with after-tax dollars. When you file your taxes, the form will separate out employer vs individual HSA contributions. It will subtract your individual contributions from your taxable income, so you end up not paying taxes on that contribution, albeit later in the process.

See the article about IRS Tax Form 8889 for how the form works. As you can see, there are two different sections for employer contributions and individual contributions.

One thing to note about this strategy is that you may contribute > 50% of the Contribution Limit while you were insured for 50% of the year. This is legal per the Last Month Rule and Testing Period, and only becomes a problem if you change insurance (move to non-HSA) within the next year. That could then be classified as over contributing (because the IRS thinks you are “abusing” the system) and risk a penalty. See the full article about how the Last Month Rule and Testing Period work.

Automatic vs Manual HSA Contributions

This question was submitted by HSA reader Adam. Send yours in to evan@hsaedge.com

You explain that contributing to your HSA via automatic payroll contributions is “preferred”, yet you then explain how you choose to contribute manually every month. Is there an advantage to doing it that way?

Either method of contribution will get you to the same place, but there are a few advantages to either. Automatic payroll HSA contributions are defined as deductions from your paycheck each pay period, so you see the contribution amount taken out before taxes are paid on each check. First, if you have automatic payroll contributions, your employer is onboard with the HSA program so there may be the opportunity for employer HSA contributions which would be free money. More generally, contributions made through payroll are “pre-tax” so you immediately recognize tax savings each month (e.g. my taxable income is lower each month, less taxes paid). It also creates a disciplined system where you avoid “forgetting” to contribute, and your contributions are accounted for and organized each month and at year end. Overall it is a more organized, disciplined approach.

My employer never supported HSA contributions so I made manual contributions. To do this, I set an automatic monthly transfer from my bank account to my HSA after my second paycheck. I timed it such in case I needed to cancel the contribution, but doing it after your first pay check is probably more disciplined. These were post-tax dollars being contributed, so I paid taxes upfront and was refunded those taxes once I filed taxes. This creates money “on loan” to the government, but it was nice to get a refund. My HSA provider tracked my contributions for the year, so come tax time I verified this number, plugged it into my filing, and it helped decrease my tax liability for the year. Additionally, manual contributions gives you more flexibility to manage your cash flow. If you are investing your HSA (and know you will maintain coverage for the full year), you could max out your HSA contribution on January 1st, giving your money an extra year to grow. Or you could break it up into quarterly contributions, or contribute at year end with any money leftover.

Either way, after filing taxes your tax liability will be the same, manual contributions just involves paying the government money and then asking for it back.