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Should I contribute to a health savings account through my employer or on my own?

With the increasing popularity of Health Savings Accounts (HSAs), many American have a hard time distinguishing these accounts from the Health FSAs they are used to.  One important difference is that HSAs allow taxpayers to set up and contribute to their own account while FSAs must be set up through their employer. This HSA feature is great for employees of small companies that may not be offered benefits so they can still get tax savings from their medical expenses not covered by insurance.

Even if you work for a large employer that offers an HSA as part of their benefit package, knowing the pros and cons of making contributions through payroll and contributions through your employer can set you up to save hundreds in taxes each year:

Tax Differences

The biggest difference between the contribution methods are how they are treated for tax purposes.  If your employer offers an HSA as part of a cafeteria plan, contributions will be excluded from your wages.  Taxpayers that make contributions on their own will be able to take a tax deduction known as an adjustment.  The difference is subtle, but important.

HSA contributions made through a cafeteria plan will be not be subject to federal income tax, Social Security nor Medicare tax and are generally not subject to state income tax.  On the other hand, HSA contributions made on your own will only receive a federal Income tax deduction and generally a state income tax deduction, they will still be subject to Social Security and Medicare Tax.  For many taxpayers, the difference is more than $7 savings for each $100 contributed to an HSA through your employer compared to the same amount contributed on your own.  For a family that contributes the 2018 maximum of $6,900, that translates into more than $500 in savings by making contributions through your employer.

The character of HSA contributions as an exclusion from income vs a deduction can also impact tax credits, deductions and your eventual Social Security benefit.  Please talk to your tax and financial advisors to see which contribution method will be most beneficial to you.

Self-Employed Individuals

If you are self-employed, you will not be able to make HSA contributions through your company’s payroll, you must make your HSA contributions on your own and take the tax deduction on your tax return.


Perhaps the greatest advantage with making HSA contributions on your own is the ability to contribute when it is convenient or necessary.  If you have an unexpected bill, you can contribute the money you need into the HSA and take it out again to pay the bill right away, you don’t have to wait until payday to have the funds in your account.

Even HSAs done through your employer are much more flexible than the FSA we have known for years. HSAs allow employees to make changes to their payroll contributions throughout the year.  They still need to wait until payday to have the funds, but they don’t have to wait for a qualifying event to increase their election like they would with an FSA.

Getting an Advance from Uncle Sam

The tax laws allow a unique opportunity to get a bigger refund on your next tax return. Any contribution made between January 1 and the tax filing deadline (generally April 15th) can be treated as contribution in the prior tax year.  For example, if you receive a gift of $1,000 in January 2018 and put that money into your HSA, you could treat those funds as if they were contributed in December of 2017 and get the tax deduction on your 2017 taxes.  Some employers allow you to make these types of contributions, but many will not due to the administrative hassle of allocating funds between tax years.  On the other hand, most HSA providers make it easy for you to mark a contribution for the current or prior tax year when you make contributions directly to them.

HSAs are a powerful tool to put more money into your pocket and make those medical dollars stretch.  Knowing the pros and cons on funding your HSA can help those dollars stretch even further.