Do I need to adjust my New Jersey W-2 state wages for my HSA contribution claimed on my Fed Return? Is HSA considered a "Cafeteria plan contribution" to be added back?

[ppsfin42]

For NJ state, on the "Other Wage Adjustments - W-2" section in TT, do I need to adjust for HSA contribution?  Is it considered a "cafeteria plan contribution"?

[BMcCalpin · Accepted solution]

Yes, on the New Jersey return, TurboTax will automatically add the "employer contribution" to your HSA (this is the code W amount in box 12 on your W-2) to your Wages in line 15 of the NJ-1040.

You need to check with your HR or payroll department, because normally those people add these pre-tax items like HSA contributions back to state income when your W-2 is printed - but it is good to confirm.

On the federal return, the employer removes HSA contributions made through the employer from Wages in boxes 1, 3, and 5 on the W-2 when it is printed. Since New Jersey does not allow the deduction of HSA contributions, this is why the contributions are added back to state income.

Still, the only way to be sure is to ask your employer.

[Edited 3/23/2020 11:34 am CDT - changed intro]

[jhogan17]

I think the OP question is, if pretax HSA is a Section 125 Cafeteria plan, deducted from my Box 1 federal wages, but included in my Box 16 NJ wages, should I adjust my NJ income down by this amount?  I’m not clear that TurboTax automatically takes the Box 12 code W amounts and reduces the NJ income amount for this “medical expense” related item.  In TaxSlayer (I’m a VITA volunteer using this IRS-contracted software) we have to adjust NJ income down manually for the Section 125 amounts related to health insurance.  

[PJackson]

Is there any NJ Tax expert that can advise on this... on whether HSA contributions can be counted toward unreimbursed medical expenses on your NJ return (since this amount is added back & included in your NJ wages, when it is deducted from Fed wages) ?

[BillM223]

No, for the contributions themselves. This is because in New Jersey, the HSA is just considered an investment account, whose interest, dividends, and capital gains are taxed each year.

However, amounts distributed from the HSA, which are not deductible on the federal return when for qualified medical expenses, are considered deductible in New Jersey. And in the same vein, a distribution from the HSA that is not for qualified medical expenses which is added to federal Other Income and penalized an additional 20%, is neither added to New Jersey income nor subject to a 20% penalty, because this distribution is just the withdrawal of dollars from an investment account.

[Student108]

What if employee contributions to HSA are made outside payroll? 

I am a resident in NJ, and have three sources of HSA contributions: 1) employer contribution, 2) employee contribution through payroll, 3) employee contribution outside payroll (to reach the contribution limit).

In my W2, federal wages (box 1) is calculated as 

gross pay

+ GTL (C-Box 12) 

— 401(k) (D-Box 12) 

— Other Cafe 125 (i.e., medical premiums) 

— Cafe 125 HSA (W-Box 12) (i.e., only the HSA employee contribution through payroll)

My W2 does not report NJ wages, so I need to calculate it on my own for line 15 in the NJ-1040. How should it be calculated, particularly given the different sources of HSA contributions?

Also, should "total unreimbursed medical expenses" (line 1 in worksheet F to calculate the medical expenses deduction) include all three sources of HSA contributions?

[KrisD15]

The HSA contributions are not counted as medical expenses. 

Medical expenses can be deducted from your taxable income. 

Health insurance premiums paid with after tax dollars can be claimed as expenses. 

HSA contributions are paid with pre-tax dollars if done via payroll.

You get a tax deduction (as HSA contributions) when the contributions are made outside payroll and reported on your tax return. 

Because of this, the contributions are not deductible medical expenses. Additionally, expenses paid with an HSA distribution are also not education expenses. These are all paid with pre-tax dollars, so there is no deduction from taxable income. 

New Jersey does not recognize HSA contributions as deductions and TurboTax will add the amount of the contributions shown on your W-2 to the state income shown in Box 16 when transferring your income to your New Jersey return.