I read through IRS publication 969, there is no monthly limit defined. I checked with the custodian bank, they mentioned all the $6750 I am allowed to contribute to my HSA can be done at one shot, need not be compelled to spread it across 24 pay cycles.
Problem is I have immediate medical bills to pay and my employer is not allowing me to put more money from my own pay cycle, which is very funny(actually makes me furious).
Since the employee payroll contribution is technically a voluntary salary reduction with the employer making the deposit, they can make any rules they want.
However, you can take your own cash and make a deposit, then collect the tax savings at the end of the year instead of getting the savings in each paycheck.
Or, if you can do 10 equal payments of $650 for the rest of the year, you can pay the bill now with other money and take the $6500 back out in December. You don't have to pay the bill only with the account. You just have to ensure that the amount you withdraw is the same as the amount of bills you paid.
Take 6500 back, out from my HSA ? a 6500 inside HSA is not same as a 6500 I spend out of my already taxed money. I hope you get what I am saying.
You have a bill now then you could pay it now ... then as the money is put into the HSA each pay period you take the same as a distribution to reimburse yourself for the amount you paid out earlier.
You can take the distributions per pay period, per month or all at the end of the year depending on your situation. Since medical bills usually don't incur interest you could just take a monthly distribution from the HSA and make the payment in installments.
I think nobody is understanding the reimbursement part clearly. If I spend $6000 out of my pocket it is equivalent to $9000 approx(because $6000 is an after tax dollar). So If I paid 6000 out of my pocket from my taxed money and simply reimburse $6000 from my HSA end of the year, I am at loss(of $3000).
Am I clear ? $xxx inside a HSA account is not as same as $xxx outside, in your pocket.
Ok ... still put the $6000 in the HSA and use the $6K (plus earnings) to pay the medical bills.
Putting $6K into the HSA is not like putting $9K in ... you are just saving $3K in taxes so you have $3K more in your pocket not $3K more in the HSA.
If you put $6K in the HSA you save federal + state + FICA taxes on that amount. So if you are in the 25% tax bracket + 3-10% state taxes + 7.65 FICA = 35.65 to 42.65% in taxes which will be reflected in your paycheck not in the HSA account.
Now the employer may also put some into the HSA which you can also tap into to pay medical bills. If they also contribute that may be why they will not do so in advance in case you don't stay the entire year.
Can you please explain more about what you said here - "If you put $6K in the HSA you save federal + state + FICA taxes on that amount. ". I am confused. If I am putting $6000 into my HSA, it is from my earnings. My earnings are already tax deducted. So I will lose money in tax if I deposit my post tax payroll dollars into HSA. I am sorry if this is not clear. The money in my pocket is after tax. Why would I put that into HSA and how do I get advantage.
"Now the employer may also put some into the HSA which you can also tap into to pay medical bills. If they also contribute that may be why they will not do so in advance in case you don't stay the entire year."
Even if an employer contributes to my HSA, they do not contribute from their pocket, it is from my Payroll. Say if my employer deposits $1000 in Sep2016, say my monthly gross pay is $8000, since they paid $1000 to my HSA, my gross will be $7000 only. SO it is my money, not employer's money. Regardless of whether I stay entire year or not, they are contributing to my HSA from my money which is due from them for the work I did for them till THAT DATE.
I hope I am not confusing! :(
Assuming you don't have an employee match, then:
If you put $6000 in an HSA via payroll deduction, you will actually drop your take-home pay by $4,500. You still pay social security and medicare tax on the HSA contribution, but not state or federal income tax. You put in $6000 but it only "Feels" like $4500 because it goes in pre-tax.
Instead, let's say you deposit a $6000 lump sum and immediately withdraw $6,000 to pay your bills. That costs you the whole $6,000 up front. BUT (and this is the important part) you take a $6,000 deduction on your form 1040. That saves you $1,500 in taxes. So you get a bigger tax refund in March than you would have without the deduction.
In other words, if you make payroll contributions today, you see the tax savings today. If you make a lump sum deposit, you see the tax savings later. But it is exactly the same dollar amount of tax savings in the end.
And more than that, there is a way to move the tax savings forward anyway. If you make a $6000 lump sum today, and withdraw it tomorrow to pay your bills, you can go to your employer and claim 2 extra allowances to your W-2. That will result in you getting the tax deduction in your take home pay instead of waiting until March.
"If you make a $6000 lump sum today, and withdraw it tomorrow to pay your bills, you can go to your employer and claim 2 extra allowances to your W-2. ".
You mean at the end of the year when I file my taxes, for example in Turbo tax, I claim extra allowances and get back possibly the tax i lost by putting taxed money into my HSA on my own ? Just trying to be clear and get the answer I want 🙂
Or are you saying I should go to my employer and get a "Corrected" W2 since the money I have put on my own into my HSA goes unreported ?
Nope, I think you are confused.
Start by putting the lump sum of $6000+ into the account, then withdraw it to pay your medical bills. If you change nothing else, you will get a $1500 -larger refund in March than you would have gotten, because the $6000 deposit is a tax deduction. (It is not a tax deduction on form 1040 if you make payroll contributions, because it is already pre-tax and your W-2 will be lower instead.) Got it so far?
So now, you have a $1500 refund "in the bank" with the IRS. You can leave everything alone and collect it in March. Or, you can adjust your W-4 (not your W-2). Your W-4 is the form you file with your employer that calculate how much tax should be withheld each week. If you are married with two children you might claim 4 or 6 allowances, depending on if your spouse works and how old your children are. Claiming a certain number of allowances is a way of predicting how much tax you will owe so that it can be taken out in bi-weekly installments. If you raise the number of allowances by 3 from what it is now, that will result in you getting about $125 per paycheck extra in take-home pay. Over 10 pay periods left in the year that's $1250. That's not free money, it's reducing your tax refund. You can do it in this case since you have a $1500 refund "in the bank" thanks to the lump sum HSA contribution.
So changing your W-4 would be a way of getting that refund spread out over the last 10 pay periods of the year instead of waiting until March of next year.
If you do this, remember to change your W-4 back to normal in January, otherwise you will not pay enough withholding in 2017 and will owe at the end of the year.
(Your W-2 is just a report at the end of the year of all your wages and tax withholding.)
I think I was super confused. So in simple terms - if i put money into my HSA from my pocket, I can get the tax refund when I file returns, that shouldn't be an issue.
Yes, if you make a lump sum contribution with after-tax dollars, you get a tax deduction later. It's the same dollar amount of tax savings as if you made contributions through your employer, it just comes to you in a different form. Just make sure that your total contribution by both methods are not more than the annual maximum for your age and type of insurance.
Ok. Thanks. My payroll pre-tax contribution is also happening and I am planning to deposit the after-tax dollars to pay bills quicker. Where do I mention the after-tax dollars while filing my returns ?
Your payroll contributions will be recorded in box 12 of your W-2 with a code W and Turbotax will automatically pick them up. In Turbotax, your medical expenses are reported on the Deductions and Credits page in a section for HSA/MSA contributions. You will first be asked if you had withdrawals from an HSA, which will be reported to you on a form 1099-SA sent by the plan administrator. After entering the withdrawals, there is a box to check for "Yes, I used all the withdrawals for medical expenses." (Don't skip this or the money will be taxed.) Keep going and it will next ask if you made any out of pocket contributions. All this information will go onto a form 8889 as part of your final tax return.
WAIT .... if you have the payroll deduction then you don't have to also put after tax money in the HSA ... just pay the bills now if you want then take the deductions from the HSA as the money is put in to the account to reimburse yourself like I said originally. No one is stopping you from paying the medical bills now if you want to and the distributions when the money is in the account paid to yourself directly ... they do not have to be paid to the doctors. As long as the HSA deductions you take are at least as much as your annual medical bills you pay all is good.
I think putting money in yourself AND having payroll deductions is inherently dangerous as you are sure to put in too much which means you will incur a penalty for excess contributions and you have to have the excess contributions ( with earnings) withdrawn timely on with you would owe taxes as well.
And if you have made an election for X amount to be put into the HSA thru the payroll system you cannot change that amount ... don't put in too much ... leave the payroll system work.
@Critter#2 those things are true but are more complicated to visualize and depend on the employer.
My employer will allow me to set an annual contribution amount and change it at any time. They look at what was already contributed, and divide the leftover by the number of pay periods. This employer may not do that. If he elected $100 per pay period for example, he may be stuck with that. That would mean he can contribute a lump sum of $4350 without getting into trouble.
Also, it depends on how much money he actually has on hand. Let's assume the taxpayer has $6000 in the bank to pay medical bills. Yes, he can pay out the $6000 to the doctors now, increase his payroll deductions to max out by the end of the year, and withdraw the $6000 on December 30 to pay himself back. But, the combination of paying $6000 out of pocket plus losing $500 per month in take home might be more than they can handle. Whereas contributing the lump sum on Monday and withdrawing it to pay the bills on Wednesday does not change his take home pay. While increasing the payroll deduction and paying the bills late may incur interest and late fees.
Making a direct lump sum deposit if the cash is on hand, and taking it out the next day, is legal, easy to comprehend, and not dangerous at all as long as the taxpayer does not go over their overall annual limit.
I agree and this person has been confused ... but if the employer won't let him change to put in more now he might not be able to change it later ... best to talk to the employer to best understand what is possible with the HSA.
Employer will let me change but within his set limit. say per month I want to put 1000 dollars and stop election after 6 months. They wont allow, they would allow only 670dollars per month to be deposited. They want the deposit to be equally distributed per pay cycle.
I agree with Critter, just pay the medical bills now out of your pocket, then in December withdraw that amount from the HSA.
Contributing to an HSA through the employer is usually better than directly contributing to it. Contributing through the employer usually saves Social Security and Medicare taxes, while contributing directly does not.
I thought I was right in the beginning ... which is a plus for employers since they pay less taxes as well.
"Yes. Employers may make pre-tax contributions to their employee's HSAs if they have a cafeteria plan in place that provides for HSA contributions. These contributions are not subject to witholding from wages for income tax or subject to FICA, FUTA or the Railroad Retirement Act."
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