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While opening a Health Savings Account with Fidelity, I was asked whether I wanted to add money to my account by either linking a bank account or directly depositing my paycheck. My understanding was that HSAs are tax-free, but deposits made into a bank account have already had payroll taxes deducted from them.

Would funding my Fidelity HSA by linking a bank account cause me to pay taxes I would otherwise avoid by using direct deposit?

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  • Is this screenshot that you have taken from your employer's payroll website, or is this directly on Fidelity's website, separate from your employer payroll?
    – Ben Miller
    Dec 1, 2023 at 1:26

3 Answers 3

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Would funding my Fidelity HSA by linking a bank account cause me to pay taxes I would otherwise avoid by using direct deposit?

Yes. As you mentioned, paying out of a bank account means you've already paid payroll taxes on that money, and you won't be able to take a deduction for those payroll taxes after-the-fact. The benefit of making HSA contributions directly from payroll is that they aren't subject to payroll taxes to begin with. So depending on what payroll taxes you're paying - 6.2% Social Security under the wage base, 1.45% Medicare, and 0.9% Additional Medicare for earned income abovea floor, it could be the difference of a few hundred dollars of taxes each year.

Note that regardless of how you make your HSA contribution, you'll be able to take federal income tax and state income tax (except for CA and NJ) deductions.

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  • I don't know about CA, but NJ is very retentive regarding its income tax. Very retentive. Dec 1, 2023 at 13:05
  • @MindwinRememberMonica: CA's attitude, as I recall, is basically "HSAs are tied to HDHPs, HDHPs are a conservative policy option, we don't like conservative policies, so we don't like HDHPs and HSAs."
    – Kevin
    Dec 2, 2023 at 19:54
  • @Kevin CA never aligned with federal tax treatment for HSAs, so they're just taxable accounts for CA state tax. Unfortunately, CA doesn't have automatic alignment with federal tax, so a lot of fed changes (like 529s for grade school tuition or HSAs) need to be manually approved by legislators, and often don't.
    – Stan H
    Dec 3, 2023 at 5:55
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Based on the screenshot that you took, I think that it is possible that there is a misunderstanding here of what your options are and the tax implications.

There is a difference in tax between contributing via payroll deduction through your employer, and contributing outside of payroll deduction. The differences are in the payroll (FICA) tax, as well as the method of how the contribution gets deducted for income tax purposes. In order to get the payroll tax deduction, the contribution needs to be sent in by your employer.

Looking at your screenshot, it appears to me that you are looking at Fidelity's website, and that this is not part of your employer's payroll system. Your two options are listed as:

  • Link a bank account to transfer funds and set up recurring deposits.
  • Have money from each paycheck deposit automatically into your new account.

The second option sounds like payroll deduction, but if Fidelity is simply transferring money from one of your accounts to another everytime a paycheck is deposited, and these deposits do not appear on the paystub that you get from your employer, then you would still be paying payroll tax on that money. If you want to contribute via payroll deduction and avoid the payroll tax on your contributions, you need to talk to your employer and ask them how to set it up.

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    The wording doesn't sound like "Fidelity is transferring money each pay period". It sounds like Fidelity will provide an ACH routing and account number pair intended to be given to the employer and used with split direct deposit. Note that while this will appear on paystubs, it still doesn't get the favorable tax treatment (the employer doesn't know whether the split pay is going to an HSA, taxable brokerage, savings account, etc)
    – Ben Voigt
    Dec 1, 2023 at 17:47
  • @BenVoigt The small business payroll system I use lets me set up a HSA contribution with separate ACH routing, with options for taxable or pre-tax, employee or employer contribution. So no, if the employer is competent and so informed, then they will treat it correctly.
    – user71659
    Dec 1, 2023 at 20:19
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Looking at the screen capture and being concerned that this HSA account might not be connected directly to employer made me look at the Fidelity site in more detail.

The first requirement for adding new money to an HSA is to be enrolled in a qualifying HSA eligible health plan. Putting money in before the insurance plan starts isn't helpful. Putting new money in after the plan ends isn't helpful.

The Fidelity website explains how you can contribute new money via HSA deposit options

If you're covered by an eligible health plan, you can contribute to your HSA in several ways.

  • Use electronic funds transfer (EFT) or electronic direct deposit. Make one-time or recurring direct deposits from a linked bank account. You can update your recurring deposit amounts any time.
  • Transfer funds from an existing Fidelity account. Make a one-time contribution from an eligible Fidelity account to your HSA.
  • Deposit a check. You can deposit a check via mail or through the mobile app

What about payroll deductions from my employer? Your employer may allow automatic pre-tax payroll contributions to a personal Fidelity HSA. If that’s an option for you, they will need your account number along with the Fidelity routing number (also known as the ABA number) 101205681.

  • Use the Fidelity prefix 39900001 followed by your 9-digit account number.
  • Your Fidelity account should be classified as a checking account for Automated Clearing House (ACH) purposes.

Pay attention to that first line. Make sure everything is in place insurance wise before putting money into an HSA.

The payroll deduction they mention implies that some companies will allow you to designate your own HSA custodian. Some don't. If your employer allows it, you might be able to save the payroll tax amount. If they aren't flexible, then you will have to pay the payroll tax, but get the income tax back when you file your tax return.

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