Healthcare savings account (HSA) is a medical savings account that can be used on a tax-advantaged basis. To be eligible for an HSA a participant must be covered by a high deductible health plan. HSA accounts belong to the employees and they can take the accounts with them if they leave their employer. HSA accounts can be funded by either the employer or employee or both.
Federal Tax Issues:
All qualified contributions into an HSA are tax-free. Employer contributions are not part of the employee’s income. Employee contributions can be deducted off the employee’s individual tax return. Any distribution from an HSA for qualified medical expenses is tax free. HSAs are managed similar to IRA’s. There are a variety of investment options that the participant can invest their money.
Participants can make withdrawals from HSAs after the age of 65 for non-medical purposes but the withdrawals are taxed as ordinary income (similar to an IRA). If distributions for non-medical purposes are made before age 65 there is a 10% tax penalty.
New Jersey Tax Issues:
New Jersey does not presently recognize HSAs as tax favored vehicles presently (although there is pending legislation that may change this). All is not lost though, if the participant handles it correctly. HSAs follow similar rules for NJ as Sect 125 plan, pretax medical benefits. Employer contributions to HSAs are included in NJ income and employee contributions are not deductible on the NJ individual tax return. But withdrawals from HSAs for medical purposes are deductible on the NJ tax return (subject to a 2% exclusion) as medical expenses. Please consult your tax advisor.
What Does This Mean for Payroll Reporting?
Employer contributions to an HSA should be reported, by the end of the year, to Digit Payroll. Federal taxable wages will not be affected, although New Jersey state taxable wages will increase by this amount. Employee contributions need not be reported.
For more information go to the U.S. Dept. of Treasury web site.