@kunhardt-edward wrote:
Thanks so much for the answer! One other clarifying point I forgot to bring up....What if my employer also contributed to my HSA? Would it be treated the same way? The HSA bank will send me the check for that amount and I'll just treat it as additional income? (As an aside: Seems kinda strange if that's the case, because it would be like a loophole for me to increase my salary at that point).
Once the money is in the HSA, it's all "yours". Technically, all HSA contributions made by payroll deduction are "employer" contributions, including your voluntary contributions and cash-match or incentives. Per the tax code, what happens is you agree to a salary reduction, and the employer contributes that money to the account instead.
You must also withdraw the earnings on the excess contribution, if there are any. Since these earnings will be paid to you in 2022, they would be reported as taxable income on your 2022 tax return. The HSA bank knows this is part of the procedure and will do it automatically. If you are invested in a regular savings account, it might only be a few pennies. If you invested part of your money in the stock market, it could be more.
Yes, this can result in you obtaining extra money from your employer that you would not have obtained if you didn't enroll in the HSA. How your employer feels about it is up to them, the tax code doesn't care.
(Incidentally, there is a second "loophole". Your HSA contributions are deducted from your payroll before calculating any taxes, including federal income, state income, social security and medicare tax. You will pay federal and state income tax on the unallowed or excess contributions, but you don't pay SS or medicare tax. So it's still about a 7% tax break. But, this reduces your social security wage base, which may result in a benefits reduction in retirement. It's just how things are set up.)
If you can afford to contribute the maximum to an HSA and let the unspent amount accumulate, it's a great way to put money away for retirement, either medical needs or ordinary spending. In fact, you should probably maximize your HSA contributions before you think about making IRA or 401(k) contributions. Presumably you can do this starting January 2022, as long as you don't also re-enroll in the FSA.
Also be aware that you can have a "limited purpose" FSA and still contribute to an HSA. A limited purpose FSA only covers medical expenses not traditionally covered by insurance, like dental care and eyeglasses/contact lenses. You may want to see if your wife can enroll in a limited purpose FSA next year if you expect to have such expenses.
