Tax Treatment of HSA Contributions
Within the limits noted above, contributions to HSAs (including contributions by family members or other persons on behalf of an eligible individual) are deductible by the eligible individual in determining AGI, i.e., an above-the-line deduction. Contribution to the HSA may not be deducted as an itemized medical expense deduction.
Employer Contributions
If an eligible individual’s employer contributes to the employee’s HSA, the contributions (within the limits) are treated as employer-provided coverage for medical expenses under an accident or health plan and are excludable from the employee’s gross income. They are not subject to income tax or FICA withholding (or FUTA tax). Contributions to an employee’s HSA through a cafeteria plan are treated as employer contributions. An employee may not deduct the employer’s HSA contributions as either an HSA contribution or a medical expense on his or her return.
Partnership and S Corp Contributions
If a partnership or S corporation contributes to a partner’s or shareholder’s HSA, the tax treatments are as follows:
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If Partnership treats the contribution as a guaranteed payment made for services - it is includible in the partner’s gross income and treated as self-employment income. The partner, if otherwise qualified for an HSA, may deduct the contribution as an adjustment to gross income.
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If Partnership treats the contribution as a distribution to the partner under Section 731 - it is not deductible by the partnership, doesn’t affect the distributive share of partnership income and deductions, and isn’t includible by the partner as self-employment earnings. The HSA contribution is reported as a distribution of money on Schedule K-1(1065). (Under Sec 731, a partner includes the distribution of money as income only to the extent that the amount of money received exceeds the partner’s adjusted basis in the partnership prior to the distribution; basis in the partnership is reduced, but not below zero, by the amount received.) The partner, if otherwise eligible, is allowed an above-the-line deduction for the HSA contribution.
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S Corp contributes to the HSA of a 2% shareholder who is an employee - the amount is treated as a guaranteed payment includible in the shareholder-employee’s gross income. The contribution amount is deductible by the shareholder-employee as an above-the-line HSA contribution provided he or she is otherwise eligible under the HSA rules.
Excess Contributions
Contributions in excess of the limits noted above are not deductible. Contributions by an employer to an employee’s HSA are included in the gross income of the employee to the extent they exceed the limits, or if they are made on behalf of an employee who is not an eligible individual. In addition, a 6% excise tax for each tax year is imposed on the account beneficiary for excess individual and employer contributions, unless the excess contributions and the net income on the excess are paid to the account beneficiary by the due date (including extensions) of the return for the tax year. If the excess is withdrawn timely, then:
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Only the net income on the excess contributions is includible in the account beneficiary’s gross income for the tax year of the distribution;
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The excise tax is not imposed; and
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The distribution of the excess contributions is not taxed.