Incorrect treatment of employer contribution to an HSA

[t_taxslave]

Code W in Box 12b of W-2 includes the TOTAL amount contributed to an HSA, both by the employer and the employee. However, TTAX incorrectly assumes this amount is contributed exclusively by the employer and increases the state taxable income by this amount (CA in my case). Only the employer contribution should increase the state taxable amount. TTAX should ask what was the employer contribution and not automatically assume it is the number reported in Box12b.

[Mike9241]

Ca allows no deduction for HSA. so employer and your contributions become additional income.

[t_taxslave]

Thank you. You are right, it is a CA problem, not a TTax problem. Although I am still not able to find an affirmative statement to that effect on the CA tax site and Schedule CA specifically refers to "HSA employer contributions" only.

[Critter-3]

Code W in Box 12b of W-2 includes the TOTAL amount contributed to an HSA, both by the employer and the employee  

That is how the IRS says it should be.    Any contribution to an HSA made by an employer on behalf of an employee is not excluded from income and must be added to the AGI of the employee on the employee’s California return.

The employee contribution of the HSA in box 12 reduces the  federal income reported on the W-2 in box 1 automatically but the CA income in box in box 16 should be including the employee and employer's box 12 contributions already ... you do not need to add them in again. 

[t_taxslave]

Thanks as well for the clarification. In the end all calculations turn out correct. What remains confusing for CA filers who take the questions literally are the misleading references to "employer contributions" on Schedule CA, reinforced by TTax in the "Learn more" "Tax Guidance" pop-up under the HSA line in "What income CA handles differently", which reads:

"What should I know about contributions to a Health Savings Account (HSA)?

If your employer contributed money to an HSA on your behalf, that contribution is not taxed by the federal government. However, California considers it taxable income."

It should read: IF YOU OR YOUR EMPLOYER...

I should have titled the initial post "Misleading explanation" as opposed to "Incorrect treatment". Thanks again for the responses.

[gurevichl-lg-gma]

Dear TurboTax, please fix this issue that appeared after 3/2/22 update (was not an issue in prior versions) as it affected my  Federal Tax numbers (regardless of states), it treats employer contribution as Other income, overstating my tax liability. 

[BillM223]

What issue are you referring to? The issue referred to above is not an error on the part of TurboTax but a misreading of IRS documentation by taxpayers.

@gurevichl-lg-gma

[Anonymous]

I still believe there is a problem. My W2 Box 12 (next to code "W"),  contains $3,650. I know for a fact that my employer only contributes $700 per year. Make whatever you want of that, but ultimately, the "Your HSA Summary" page in TurboTax clearly says, "Tax-free employer contributions". The amount shown for me is $3,650. That is incorrect. Again, my employer only contributed $700; I contributed the balance of $2,950. Is TurboTax incorrectly wording this? Should it rather say, "Employer & employee tax-free contributions" as it does on the W2 instructions and code "W" definition?

[joann44]

"Employer contribution" means the amount that was remitted via your employer and has already been excluded from your income.  It is confusing language, it's the language the IRS uses.  An employee contribution, for purposes of this form and this question would be amounts directly remitted to the HSA company and not handled through payroll deductions. 

[Anonymous]

Hi @joann44 , in which case shouldn't Box 12 "W" only include what my employer contributed and not what they withheld from my paycheck as HSA contributions?

[RalphH1]

@Anonymous, I agree with you that box 12 should include only the contributions your employer made, since they're calling it “Employer Contributions”!  But someone at the IRS (who wasn’t being as sensible as you are) decided to call it that even though it includes amounts deducted “pre-tax” (in a cafeteria plan) from the employee’s check (see the instructions for Form 8889 here).

It does make sense that the two different kinds of contributions are treated the same. As Critter-3 and others said earlier in this thread, they’re both amounts which the employer is considered to have paid to you, which weren’t taxed because they went to the HSA instead of directly to you. So they both go toward your maximum contribution for the year, and no distinction is made between them in the event of excess contributions or for other purposes...

[Anonymous]

@RalphH1 Thanks for the affirmation!! I really appreciate it!!