HSAs & Income Taxes: Preparing for 2021 Filing
February 17, 2021
January 2021 has already flown by, and a new year means preparing to file new tax returns. Owning a Health Savings Account (HSA) has tax implications, so here’s what HSA account holders and HR teams need to know for the upcoming tax season.
Are HSA contributions subject to income taxes?
HSA contributions are not subject to federal income taxes. In most states, HSA funds are not subject to state income taxes either. HSA contributions, however, are subject to payroll taxes.
Employers often make HSA contributions through a Section 125 salary reduction arrangement (aka cafeteria plan). Money an employer puts into an HSA is made before tax liability gets calculated, so the employee will owe less in income and payroll taxes on their salary.
Employer contributions to an HSA aren't considered income so there’s no need to pay income tax or payroll tax. If employees make HSA contributions through a Section 125 salary reduction arrangement, these are considered employer contributions. As a result, employees won't pay income or payroll taxes either.
What tax forms are needed?
If an employee withdraws HSA funds or their employer makes HSA deposits, the employee must file a Form 8889 to do the following:
- Report HSA contributions
- Report HSA withdrawals
- Determine HSA tax deduction
- Determine amount owed in income or additional tax if employee is not eligible to make contributions in that tax year or used funds on a non-qualified expense
If contributions were made, the HSA administrator will send Form 5498-SA. If there were any distributions or withdrawals from the account, the individual will also receive Form 1099-SA.
Can tax refunds be deposited into an HSA?
Yes, if the individual provides the appropriate information for direct deposit into the HSA with their 1040 tax form.
Having a good understanding of how HSAs can impact tax returns is one step in being prepared for tax season.
Please note: You should not construe this information as providing legal or tax advice. This information is educational in nature and does not address the circumstances of any particular individual or entity. As always, consult your tax advisor for more specific advice.