How does the tax impact change of HSA payroll contribution vs. self contribution?

[Kris-S]

My employer will allow me to adjust my HSA contribution throughout the year, but will only allocate the new amount evenly over the remaining paychecks for the year (my employer does not make any company contributions, unfortunately).  For various reasons I would like to do a large self contribution up front and then have $0 contributions the remainder of the year.   If I make my own large contribution up front, do I end up losing out on tax benefits in the end?  I understand that by not having it done via payroll I don't get the immediate tax benefits.  However, don't I essentially make up for that when I file my year end taxes?  I have read that I would miss out on payroll tax deductions completely (FICA, medicare, etc), but I'm thinking it's not missing out, but rather delayed (putting the time value of money aside).

[Opus 17 · Accepted solution]

If you make contributions via payroll, you gain an additional 7.65% tax savings because the HSA deduction is taken out before social security and medicare tax.  If you pay yourself, you get the income tax savings but not the payroll tax savings.

So if you, for example, contribute $2000 now and then $116 per month, you would be giving up $153 in additional tax savings.

If you are trying to build up your account for a large bill early in the year, note two things.

1. If you did not max out your contribution for 2017, you can make a contribution up until April 15, 2018, and have it treated as a 2017 contribution.  You get the tax savings on your 2017 tax return and you still have a full limit for 2018.  Be sure to tell the trustee this is a prior year contribution.

2. If you have a large bill early in the year and not enough to cover it, you can pay out of pocket and then reimburse yourself at the end of the year once your account fills up.

[Kris-S]

Thanks!  Makes sense!

[TomYoung]

"How does the tax impact change of HSA payroll contribution vs. self contribution?"

The tax benefit is of having an HSA is that you get to put some of YOUR money into an account YOU control and own, the money that goes into the account is not subject to income tax and the money inside the account grows tax free. 

This benefit obtains whether the money goes in pre-tax via payroll deductions or after-tax via checks you deposit.  That is, if during the course of the year you put $1,000 of pre-tax money into an HSA, that money has never been subject to income tax.  If however you put $1,000 of after-tax money into an HSA, you get a deduction for the contribution.  The net from an annual income tax standpoint is exactly the same either way.

The advantage of pre-tax HSA contributions is that this money is not subject to FICA, while any after-tax money you contribute has been subject to FICA..  So you have to earn MORE after-tax money to make a given contribution then you'd if the contribution was pre-tax.  More or less you're looking at a 7+ percent "front end load" when you make contributions after tax.  Whether you can overcome that front end load by making your after-tax contributions at the beginning of the year as opposed to the pre-tax contributions trickling in over the year is a matter you have determine.

Tom Young

[Kris-S]

Thanks!!