Author Topic: HSA: effect on social security?  (Read 7386 times)

AllezAllezAllez

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HSA: effect on social security?
« on: February 16, 2015, 03:14:23 PM »
In my second year with an HSA, and so far pretty happy, since I am healthy and use very little of it, it's well invested in a couple of vanguard funds, and my employer contributes the amount of my deductible and only requires me to put in a little bit. I am just about ready to maximize my payroll-deduction contribution on account of all of the obvious benefits, but I want to make sure I know what the possible drawbacks might be.

So I'm wondering what effect, if any, this kind of HSA contribution has on earnings for purposes of (eventual) social security payment? I.e., if I contribute, say, $2000, and my income and social security tax in turn go down, does that lower my eventual benefit? Should I max out the HSA anyway? If it matters, my salary is solidly in the 25% tax bracket, and likely to stay there.



seattlecyclone

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Re: HSA: effect on social security?
« Reply #1 on: February 16, 2015, 10:46:01 PM »
Yes, if you earn less than the cut-off for annual social security taxes, any pre-payroll-tax deductions (such as health insurance premiums or HSA contributions) will reduce your eventual social security benefits.

The formula for people born in 1953 (i.e. just becoming eligible to file for benefits this year) is here. Basically the way it works is you fill in your earnings history and scale each year's earnings up for inflation. Then you take the highest 35 inflation-adjusted years and add them up.

If this total is less than $346,920, each additional $1,000 of lifetime earnings would get you an additional $2.14/month in social security if you start getting benefits at age 66.
If the total is between $346,920 and $2.09 million, each additional $1,000 of earnings would get you an additional 76/month if you start getting benefits at age 66.
Past $2.09 million of lifetime earnings, each additional $1,000 earned would get you an additional 36/month.

I think most of us will do better by saving the payroll tax and income tax now and letting the money compound for us over time.

HazelStone

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Re: HSA: effect on social security?
« Reply #2 on: February 17, 2015, 12:37:46 PM »
Guys, you are confusing FSAs and HSAs.  FSAs reduce your social security payroll tax liabilities (so you have that much less wages recorded on your earnings record, but you save the FICA tax now). Employers love these because they don't have to pay their half of your social security taxes on any money you route through an FSA.

HSAs save you income taxes but not social security taxes. Therefore, HSAs do not affect your earnings record.

I am not a CPA, I spent six years working in insurance purgatory, but a simple citation is always nice and this advice is worth what you paid for it:
http://www.hsabank.com/hsabank/education/tax-benefits

seattlecyclone

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Re: HSA: effect on social security?
« Reply #3 on: February 17, 2015, 12:41:03 PM »
If you contribute to an HSA through payroll deductions in conjunction with your health insurance, these contributions are often not subject to payroll tax. Neither my employer nor my wife's employer withhold payroll tax on HSA contributions, and I have little reason to believe they're violating the law.

Nothlit

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Re: HSA: effect on social security?
« Reply #4 on: February 17, 2015, 12:57:31 PM »
Guys, you are confusing FSAs and HSAs.  FSAs reduce your social security payroll tax liabilities (so you have that much less wages recorded on your earnings record, but you save the FICA tax now). Employers love these because they don't have to pay their half of your social security taxes on any money you route through an FSA.

HSAs save you income taxes but not social security taxes. Therefore, HSAs do not affect your earnings record.

I am not a CPA, I spent six years working in insurance purgatory, but a simple citation is always nice and this advice is worth what you paid for it:
http://www.hsabank.com/hsabank/education/tax-benefits

You are right when it comes to HSA contributions made "after tax" and deducted on Form 8889. However, that is not the only way to make HSA contributions. HSA contributions can also be made via payroll deduction through a cafeteria plan, just like FSAs, in which case the contributions are exempt from FICA taxes in addition to income taxes. Here's the IRS explanation (emphasis mine):

Quote
Q-19. What is the tax treatment of employer contributions to an employee's HSA?

A-19. In the case of an employee who is an eligible individual, employer contributions (provided they are within the limits described in A-12) to the employee's HSA are treated as employer-provided coverage for medical expenses under an accident or health plan and are excludable from the employee's gross income. The employer contributions are not subject to withholding from wages for income tax or subject to the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), or the Railroad Retirement Tax Act. Contributions to an employee's HSA through a cafeteria plan are treated as employer contributions. The employee cannot deduct employer contributions on his or her federal income tax return as HSA contributions or as medical expense deductions under section 213.
« Last Edit: February 17, 2015, 01:00:24 PM by Nothlit »

Franklin

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Re: HSA: effect on social security?
« Reply #5 on: February 17, 2015, 01:13:52 PM »
Quote
This is true for HSA contributions made "after tax" and deducted on Form 8889. However, that is not the only way to make HSA contributions. HSA contributions can also be made via payroll deduction through a cafeteria plan, just like FSAs, in which case the contributions are exempt from FICA taxes in addition to income taxes. Here's the IRS explanation (emphasis mine):

One thing to consider - none of this matters to a high wage earner.  You pay FICA on your first $118,500.  So if you make say $130K or more and take the full HSA deduction of $6500 then you will still pay the maximum amount.   

AllezAllezAllez

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Re: HSA: effect on social security?
« Reply #6 on: February 17, 2015, 03:09:11 PM »
each additional $1,000 of earnings would get you an additional 76/month if you start getting benefits at age 66.

Ah, thank you! That's just the sort of info I was looking for, but I had no idea where to find it. I knew vaguely about this benefit calculation so I had a feeling the effect would be quite minimal, but it's always better to act on facts.