Yes, contributions made to an HSA are a tax deduction and will reduce your taxable income. Therefore, since HSA contributions reduce your taxable income, the amount of taxes you owe will decrease which can cause an increase in your tax refund. Distributions from an HSA will not affect your refund, unless the funds were used for non-medical expenses.
Per IRS Publication 969:
An HSA may receive contributions from an eligible individual or any other person, including an employer or a family member, on behalf of an eligible individual. Contributions, other than employer contributions, are deductible on the eligible individual's return whether or not the individual itemizes deductions. Employer contributions aren’t included in income. Distributions from an HSA that are used to pay qualified medical expenses aren’t taxed.
Your employer contributed $1,350 to your HSA. By default, the IRS considers this taxable income. So when you enter your W-2 with the code W in box 12, your income goes up and your refund goes down.
However, when you complete the HSA interview and show that you had qualifying HDHP coverage for the year, then the $1,350 that you entered in box 12 with a code of W is removed from your income and your refund should normally increase.
Note that if you had a 1099-SA that reported on distributions from your HSA (payments for qualified medical expenses), this, too, is considered income when it is first entered, but when you answer the question on the next screen that the 1099-SA amount was all for qualified medical expenses, then the 1099-SA amount will be removed from income and your refund will go back to where it was.
There is often a considerable time lag between the time you enter your W-2 and the time you complete the HSA interview. This is why we advise you not to watch the refund meter too closely as there are things going on in the background that you may not be aware of. Just make sure that you complete the HSA interview, and it will be OK.
@BillM223 I completed by HSA interview, but my refund still decreased about $500. The specific question that is driving this decrease is "Was Sarah covered by a High Deductible Health Plan (HDHP) in 2019?
I selected Yes, I was covered by an HDHP during at leats one month during 2019, and my refund decreased by $500. I do not understand this because you are required to have a HDHP if you are contributing to an HSA.
"Was Sarah covered by a High Deductible Health Plan (HDHP) in 2019?"
When you answered "Yes" to this question, three new lines were exposed underneath it: one asking if you had Family coverage all year, one asking if you had Self coverage all year, and the last asking if you had different types at different times of the year.
How did you answer on these three lines?
Also, did you get to the end of the HSA interview?
And when you did, did you go and look at line 8 on Sch 1 on your 1040 - is the code W amount there with the notation of HSA or 8889 or Health Savings Accounts to the left?
The code W amount should not be here. Come back and tell me if it is.