Who is Eligible to Make Pre-Tax and Post-Tax HSA Contributions?

Well, the short answer is, if on the first of any month, you can still answer the Health Savings Account (HSA) eligibility questions the same way as when you were asked while opening your HSA, then you are! But you don’t remember them, do you?

To open your HSA you had to say “yes” to the following:

  • Are you covered by an HSA-qualified High-Deductible Health Plan (HDHP)?

And you had to say “no” to:

  • Can you be claimed as a dependent on someone else’s taxes?
  • Are you enrolled in Medicare?
  • Do you have any other disqualifying coverage, including you or your spouse having a medical FSA?

Assuming you opened your account based on these answers, and nothing has changed, you would still be eligible to make contributions to your account.

How to Make Pre-Tax or Post-Tax Contributions

First we have to be clear on what those terms mean. A pre-tax contribution is one made by your employer, either as part of your benefits plan, or as a deduction from your paycheck which you directed to your HSA. In either case, the money comes from your employer prior to payroll taxes (such as FICA and FUTA) and Federal income tax withholding being applied.

And of course, post-tax is a contribution to your HSA after all those taxes have been taken out – for example, making an HSA contribution out of your checking account after your paycheck was deposited. In either case, you can still claim the HSA tax deduction to reduce how many taxes you pay. It’s just that in the post-tax situation you take it as an “above the line” deduction when you file your income taxes, while in the pre-tax situation, it’s reported by your employer and shows up on your W-2 so you’ve effectively already received the tax benefit by the time you file.

In addition to receiving the tax break sooner, the other advantage of a pre-tax deduction is that you and your employer avoid payroll taxes (which costs your employer 7.65% and you a little less than that, while tax cuts remain in place). To maximize tax savings, it makes sense to make your contributions pre-tax whenever you can.

Not everyone who is eligible to make HSA contributions is eligible to make pre-tax contributions. The good news is that most of us are, but the not-so-good news is that if you are a 2% shareholder in a Subchapter-S corporation, a partner in a formal business partnership or LLC, a sole-proprietor, or otherwise self-employed, then you can’t participate in your employees’ cafeteria plan, or otherwise make pre-tax contributions to your HSA because in this case you are essentially your own employer. For technical details, you can check out IRS Notice 2005-8:

If you fall into one of the above categories and are unable to make pre-tax contributions, your employees may still be able to contribute pre-tax, helping save your company money on payroll taxes. Meanwhile, you can still contribute to your HSA and take your income tax deduction at filing time! HSAs make sense for a bunch of other reasons than pre-tax contributions, so don’t let this discourage you if you fall into the limited group that can’t make them.

If you have additional questions for a specific tax scenario, ask your friendly tax advisor. If they can’t help you, they surely can find someone who can!

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