This has been confusing me for years. Why is the money that "I", not my employer, put into my HSA being listed as employer contribution on W-2? Does anyone have the 100% clear understandable answer?

[Tax-Cleric]

I keep seeing stuff like it is already deducted from your pay in box 1. Well yes it should be because it was pre-tax, so WHY is it not being added back in by box 12? That amount is definitely being taxed, because when I remove it my return goes from $3186 to $6294

[ChristinaS · Accepted solution]

It confuses a lot of people. Code W means employer-based contributions, either for you or by you. They need to be lumped together, as there is a yearly limitation on how much can be contributed to a person's HSA period. It is presumed that the employer already accounted for your own payroll contributions by removing them from your wages, but the W is only there to show how much was contributed to your HSA by you or for you.

See W2 instructions and the description of Code W:

W—Employer contributions (including amounts the employee elected to contribute using a section 125 (cafeteria) plan) to your health savings account. Report on Form 8889, Health Savings Accounts (HSAs).

In order for HSA contributions to remain without any tax consequences, Form 8889 must be completed on your tax return. On Form 8889, you describe your coverage in a High Deductible Health Plan, including who is covered and when. HSA contributions are not pretax or without tax consequences until Form 8889 says they are.

When you add the W2 and put in Code W, you have not yet completed Form 8889. So, Turbo Tax puts the excess contribution penalty on those contributions "up-front". Turbo Tax takes it off as soon as Form 8889 is completed.

You complete the screens for Form 8889 by going to:

Federal Taxes- Deductions and Credits- Medical- HSA

Assuming you had a HDHP for the year, and the amounts that went into your HSA were within the limits, your return would go back to where it was before you put the W in.

[mkochins]

Most of the HSA were from my pay deductions and only a small portion were my employer's contributions. Are both, my and my employer's, contributions are considered taxable income in California?

[Debby92886]

When Turbo Tax transfers W-2 information to California State, it is using box 12-W as all employer contribution and taxing it.  These were deducted from my pay as Pre-tax and now CA is trying to tax it.

[BillM223]

@Tax-Cleric 

The reason that both the employer contributions to your HSA and your contributions through payroll deduction are both called the "employer contribution" is because they are both treated in the same way. That is, the code W amount (which includes both) is removed from Wages in Box 1 before the W-2 is printed. This is why there is no line on your return where this deduction appears - because it was never in your income in the first place.

If you make a contribution directly to your HSA (not through your employer), this amount appears on line 13 on Schedule 1 (1040).

@mkochins1

California does not allow any HSA contributions to be deducted from income, so, yes, both are taxable in CA.

@Debby92886 

Yes, as I noted above, California does not allow contributions to HSAs. Since the amount with code W has been removed from income on the federal return, it has to be added back to income in California.