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.