How Much More Can Go Into the HSA?

Why an HSA deduction is worth more than it looks

Almost every pre-tax account saves you income tax. An HSA through payroll saves income tax and payroll tax, and the second part is the one nobody mentions.

A payroll HSA deduction is a Section 125 cafeteria plan benefit. The dollars never count as wages at all, so they escape the 6.2% Social Security tax and the 1.45% Medicare tax along with income tax. That is 7.65% on top of your bracket, and your employer saves the matching 7.65% as well.

A 401(k) does not do this. Traditional 401(k) contributions come out before income tax but after Social Security and Medicare — that is why your W-2 Social Security wages are higher than your taxable wages. The HSA is the rare account that gets out of both.

Payroll or a bank transfer is not the same contribution

People take the second route in April, when they realize they had room left. It works — the deduction gives you the income tax back — but it is the worse of the two, and it is usually chosen by default rather than on purpose.

On a $4,000 contribution that is about $306 of difference for exactly the same money going into exactly the same account. If you have room left and months left, change the payroll deduction rather than planning to true it up at tax time.

Married, both working: whose paycheck?

If you are both covered by one family HDHP there is a single limit for the household, and you can put it through either payroll or split it. So there is a real choice, and it is usually made by accident.

On a joint return the income tax saving is identical either way — one return, one marginal rate. Which means the whole question is payroll tax, and payroll tax has a ceiling: Social Security stops once your wages for the year pass the wage base. Above that line the 6.2% is already paid up and a deferral has nothing left to reduce.

So put it on the paycheck that is taxed on both for the whole year.

If one of you clears the wage base and the other does not, the one who does not is where the contribution belongs — the same dollars shelter 6.2% more there.

Two things worth knowing about that rule. It is about whose wages, not which paycheck: Social Security is tested on the year's total, so moving the deduction earlier in the year does nothing on its own. And if the higher earner is only just over the wage base, a full year's contribution can carry their wages back under it, which shelters part of the deferral after all. The calculator prices both cases rather than assuming.

The employer's money counts against your limit

This is the most common way people end up over. A seed contribution, a match, a wellness credit — anything the employer puts in counts against the same annual limit you do. If work drops $750 in and the family limit is $8,750, you have $8,000 of room, not $8,750.

Go over and the excess draws a 6% excise charge for every year it stays in the account. It is fixable — the custodian can process a return of excess contribution before the filing deadline — but it is easier to enter the employer number now.

The catch-up belongs to one person

From age 55 you can add $1,000 a year, and unlike the family limit it is not shared. It has to go into that person's own HSA. If the spouse who is 55 is also the one over the wage base, that $1,000 still has to run through their account — the tax math does not get a say.

Both of you over 55 means two separate $1,000s, in two separate accounts.

Timing and deadlines

Payroll contributions have to be withheld by the last paycheck of the year, and most employers need a pay period or two to process a change — so the useful deadline is earlier than December 31st. Count the checks you actually have left rather than estimating; if you are paid every two weeks, the paycheck calendar will list them.

Contributions from your own pocket run until the tax filing deadline in April, so you can still fill last year's room. That route just costs you the 7.65%.

If the year has rolled over

These figures change. The IRS sets the HSA limits each May for the following year, and the Social Security Administration announces the wage base each October. A calculator with last year's numbers baked into it is wrong every January, which is exactly when people go looking.

So the limits and the wage base are editable. Open Limits and wage base underneath the calculator, type in the current figures, and everything above recalculates — no waiting on us to update the page. Your numbers are remembered on that device, and quietly dropped once the page itself catches up, so you are never stuck looking at your own stale entry instead of the real thing.

If the figures on screen are for a year that has already ended, the page says so rather than quietly giving you last year's answer.

What this doesn't do

It assumes you are eligible — covered by a qualifying high-deductible plan, with no disqualifying other coverage, and not enrolled in Medicare. Enrolling in Medicare ends eligibility partway through a year, and so does joining a spouse's non-HDHP plan or having a general-purpose health FSA.

It prorates the limit by the months you were covered, which is the safe way to handle a plan that started late. There is a last-month rule that lets someone eligible on December 1st contribute the full year's limit, but it comes with a testing period running through the end of the following year, and failing it pulls the extra back into income with a 10% penalty. If that is your situation it is worth a conversation rather than a calculator.

A few states — California and New Jersey among them — tax HSA contributions on the state return even though the federal government does not. Set the state rate to zero if you are in one.

And it is a tax calculator, not advice about whether to fund the account at all. Filling an HSA while carrying a balance on a card at 24% is the wrong order, and that question is the one we would actually start with. If you want a second set of eyes on the whole picture rather than this one number, that is what the sessions are for.