HSA contributions per pay period/or on own

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Post Reply
Topic Author
TurksandCaicos01
Posts: 89
Joined: Tue May 30, 2017 9:37 am

HSA contributions per pay period/or on own

Post by TurksandCaicos01 »

My company is switching benefit plans and I know have the option of contributing to my HSA per pay period via a pre-tax deduction in my paycheck.

Previously I was putting in the maximum HSA contribution in post-tax money in January each year and investing it. This was then deducted from my taxes when I filed my annual federal taxes.

Now that I have another option, I'm not sure if there is a benefit to one or the other.

On one hand I can fully invest at the beginning of the year and have more time in the market. But the other option may have better tax options?

Not sure what to choose. Thanks
Independent George
Posts: 1590
Joined: Wed Feb 17, 2016 11:13 am
Location: Chicago, IL, USA

Re: HSA contributions per pay period/or on own

Post by Independent George »

If it's deducted from payroll, it's not subject to social security taxes. If you contribute independently, it's after social taxes are already deducted.
AnEngineer
Posts: 2407
Joined: Sat Jun 27, 2020 4:05 pm

Re: HSA contributions per pay period/or on own

Post by AnEngineer »

Independent George wrote: Mon Dec 06, 2021 7:27 pm If it's deducted from payroll, it's not subject to social security taxes. If you contribute independently, it's after social taxes are already deducted.
Also medicare taxes.

Can you set your payroll deductions to be high at that you max out early in the year?
User avatar
Artful Dodger
Posts: 1949
Joined: Thu Oct 20, 2016 12:56 pm

Re: HSA contributions per pay period/or on own

Post by Artful Dodger »

Via payroll will reduce your FICA (7.65%) tax, so that’s significant. However, if your income is over $147k, you’ll only save the Medicare portion (1.45%).
classicindexer
Posts: 207
Joined: Tue Apr 09, 2019 10:43 am

Re: HSA contributions per pay period/or on own

Post by classicindexer »

It also depends what your employer HSA provider requires the minimum cash balance to be before you can start investing and what investment options they offer. I opted to forgo the $550 tax benefit to just have a single HSA at Fidelity post-tax and not deal with rollovers or transfers from the employer HSA over to the Fidelity HSA.
User avatar
grabiner
Advisory Board
Posts: 35265
Joined: Tue Feb 20, 2007 10:58 pm
Location: Columbia, MD

Re: HSA contributions per pay period/or on own

Post by grabiner »

Independent George wrote: Mon Dec 06, 2021 7:27 pm If it's deducted from payroll, it's not subject to social security taxes. If you contribute independently, it's after social taxes are already deducted.
See Payroll deduction on the wiki. Avoiding SS taxes may be a mixed blessing, as it reduces future SS benefits.
Wiki David Grabiner
SnowBog
Posts: 4680
Joined: Fri Dec 21, 2018 10:21 pm

Re: HSA contributions per pay period/or on own

Post by SnowBog »

Pay attention at your next open enrollment. You may find the option to contribute a fixed amount allowing you to front load the HSA.
Lyrrad
Posts: 903
Joined: Sun Jul 27, 2008 10:59 am

Re: HSA contributions per pay period/or on own

Post by Lyrrad »

SnowBog wrote: Mon Dec 06, 2021 11:01 pm Pay attention at your next open enrollment. You may find the option to contribute a fixed amount allowing you to front load the HSA.
My employer allows HSA payroll contributions to be changed at any time. By default it’s split across the entire year, but I’ve been able to modify it so that it is completed in the first month of the year.
classicindexer wrote: Mon Dec 06, 2021 9:46 pm It also depends what your employer HSA provider requires the minimum cash balance to be before you can start investing and what investment options they offer. I opted to forgo the $550 tax benefit to just have a single HSA at Fidelity post-tax and not deal with rollovers or transfers from the employer HSA over to the Fidelity HSA.
My employer also provides a contribution that’s automatically deposited in their providers HSA account. So, each January I initiate a transfer to Fidelity once the maximum contribution for the year is in the account.
bberris
Posts: 2412
Joined: Sun Feb 20, 2011 8:44 am

Re: HSA contributions per pay period/or on own

Post by bberris »

classicindexer wrote: Mon Dec 06, 2021 9:46 pm It also depends what your employer HSA provider requires the minimum cash balance to be before you can start investing and what investment options they offer. I opted to forgo the $550 tax benefit to just have a single HSA at Fidelity post-tax and not deal with rollovers or transfers from the employer HSA over to the Fidelity HSA.
That amounts to almost a 3 % expense on a 20,000 portfolio. Of course it's an 8 % expense on your contribution. This would be slightly offset by an increase in SS benefits. To each his own.
dcabler
Posts: 4482
Joined: Wed Feb 19, 2014 10:30 am

Re: HSA contributions per pay period/or on own

Post by dcabler »

TurksandCaicos01 wrote: Mon Dec 06, 2021 7:22 pm My company is switching benefit plans and I know have the option of contributing to my HSA per pay period via a pre-tax deduction in my paycheck.

Previously I was putting in the maximum HSA contribution in post-tax money in January each year and investing it. This was then deducted from my taxes when I filed my annual federal taxes.

Now that I have another option, I'm not sure if there is a benefit to one or the other.

On one hand I can fully invest at the beginning of the year and have more time in the market. But the other option may have better tax options?

Not sure what to choose. Thanks
Be aware of potential tax penalty implications of front loading an HSA if you become ineligible for an HSA later in the year.

https://20somethingfinance.com/should-y ... ributions/

Cheers.
classicindexer
Posts: 207
Joined: Tue Apr 09, 2019 10:43 am

Re: HSA contributions per pay period/or on own

Post by classicindexer »

bberris wrote: Tue Dec 07, 2021 6:45 am
classicindexer wrote: Mon Dec 06, 2021 9:46 pm It also depends what your employer HSA provider requires the minimum cash balance to be before you can start investing and what investment options they offer. I opted to forgo the $550 tax benefit to just have a single HSA at Fidelity post-tax and not deal with rollovers or transfers from the employer HSA over to the Fidelity HSA.
That amounts to almost a 3 % expense on a 20,000 portfolio. Of course it's an 8 % expense on your contribution. This would be slightly offset by an increase in SS benefits. To each his own.
Good point. DW has a larger HSA from previously being the one with the family HDHP plan so now me contributing to my employer HSA and also wanting a Fidelity HSA (most assets at Fidelity) means 3 HSAs instead of 1 since you can't rollover/transfer between spouses. Since we reimburse medical expenses from our HSA, we opted for the simplicity of a single HSA at the higher expense.
User avatar
grabiner
Advisory Board
Posts: 35265
Joined: Tue Feb 20, 2007 10:58 pm
Location: Columbia, MD

Re: HSA contributions per pay period/or on own

Post by grabiner »

bberris wrote: Tue Dec 07, 2021 6:45 am
classicindexer wrote: Mon Dec 06, 2021 9:46 pm It also depends what your employer HSA provider requires the minimum cash balance to be before you can start investing and what investment options they offer. I opted to forgo the $550 tax benefit to just have a single HSA at Fidelity post-tax and not deal with rollovers or transfers from the employer HSA over to the Fidelity HSA.
That amounts to almost a 3 % expense on a 20,000 portfolio. Of course it's an 8 % expense on your contribution. This would be slightly offset by an increase in SS benefits. To each his own.
Check the math; it is unlikely to be just "slightly offset". Even if you are over the second bend point for Social Security, it's close to break-even; the increased SS payment gives you an inflation-linked annuity which is worth about as much as the amount you paid.
Wiki David Grabiner
H-Town
Posts: 5876
Joined: Sun Feb 26, 2017 1:08 pm

Re: HSA contributions per pay period/or on own

Post by H-Town »

grabiner wrote: Tue Dec 07, 2021 8:13 am
bberris wrote: Tue Dec 07, 2021 6:45 am
classicindexer wrote: Mon Dec 06, 2021 9:46 pm It also depends what your employer HSA provider requires the minimum cash balance to be before you can start investing and what investment options they offer. I opted to forgo the $550 tax benefit to just have a single HSA at Fidelity post-tax and not deal with rollovers or transfers from the employer HSA over to the Fidelity HSA.
That amounts to almost a 3 % expense on a 20,000 portfolio. Of course it's an 8 % expense on your contribution. This would be slightly offset by an increase in SS benefits. To each his own.
Check the math; it is unlikely to be just "slightly offset". Even if you are over the second bend point for Social Security, it's close to break-even; the increased SS payment gives you an inflation-linked annuity which is worth about as much as the amount you paid.
I read the Wiki article that you linked above. Just to clarify, the $550 FICA tax saving now (7200 * 7.65%) would be slightly break-even to the SS payment in the future? Does that take into account the $550 would be invested in a taxable 60/40 portfolio for 30 years?
Time is the ultimate currency.
Topic Author
TurksandCaicos01
Posts: 89
Joined: Tue May 30, 2017 9:37 am

Re: HSA contributions per pay period/or on own

Post by TurksandCaicos01 »

dcabler wrote: Tue Dec 07, 2021 6:46 am
TurksandCaicos01 wrote: Mon Dec 06, 2021 7:22 pm My company is switching benefit plans and I know have the option of contributing to my HSA per pay period via a pre-tax deduction in my paycheck.

Previously I was putting in the maximum HSA contribution in post-tax money in January each year and investing it. This was then deducted from my taxes when I filed my annual federal taxes.

Now that I have another option, I'm not sure if there is a benefit to one or the other.

On one hand I can fully invest at the beginning of the year and have more time in the market. But the other option may have better tax options?

Not sure what to choose. Thanks
Be aware of potential tax penalty implications of front loading an HSA if you become ineligible for an HSA later in the year.

https://20somethingfinance.com/should-y ... ributions/

Cheers.
Why would one become ineligible mid year?
BrokerageZelda
Posts: 463
Joined: Sat Apr 10, 2021 10:39 am

Re: HSA contributions per pay period/or on own

Post by BrokerageZelda »

TurksandCaicos01 wrote: Tue Dec 07, 2021 7:58 pm
dcabler wrote: Tue Dec 07, 2021 6:46 am
TurksandCaicos01 wrote: Mon Dec 06, 2021 7:22 pm My company is switching benefit plans and I know have the option of contributing to my HSA per pay period via a pre-tax deduction in my paycheck.

Previously I was putting in the maximum HSA contribution in post-tax money in January each year and investing it. This was then deducted from my taxes when I filed my annual federal taxes.

Now that I have another option, I'm not sure if there is a benefit to one or the other.

On one hand I can fully invest at the beginning of the year and have more time in the market. But the other option may have better tax options?

Not sure what to choose. Thanks
Be aware of potential tax penalty implications of front loading an HSA if you become ineligible for an HSA later in the year.

https://20somethingfinance.com/should-y ... ributions/

Cheers.
Why would one become ineligible mid year?
For example, losing or changing a job such that you are no longer enrolled in an eligible HDHP.
User avatar
grabiner
Advisory Board
Posts: 35265
Joined: Tue Feb 20, 2007 10:58 pm
Location: Columbia, MD

Re: HSA contributions per pay period/or on own

Post by grabiner »

H-Town wrote: Tue Dec 07, 2021 9:53 am
grabiner wrote: Tue Dec 07, 2021 8:13 am
bberris wrote: Tue Dec 07, 2021 6:45 am
classicindexer wrote: Mon Dec 06, 2021 9:46 pm It also depends what your employer HSA provider requires the minimum cash balance to be before you can start investing and what investment options they offer. I opted to forgo the $550 tax benefit to just have a single HSA at Fidelity post-tax and not deal with rollovers or transfers from the employer HSA over to the Fidelity HSA.
That amounts to almost a 3 % expense on a 20,000 portfolio. Of course it's an 8 % expense on your contribution. This would be slightly offset by an increase in SS benefits. To each his own.
Check the math; it is unlikely to be just "slightly offset". Even if you are over the second bend point for Social Security, it's close to break-even; the increased SS payment gives you an inflation-linked annuity which is worth about as much as the amount you paid.
I read the Wiki article that you linked above. Just to clarify, the $550 FICA tax saving now (7200 * 7.65%) would be slightly break-even to the SS payment in the future? Does that take into account the $550 would be invested in a taxable 60/40 portfolio for 30 years?
As I usually do in this type of calculation, I use returns on low-risk assets for a fair comparison. The fact that you hold 40% of your portfolio in bonds implies that you have some risk aversion. You would get a higher expected return if you bought stocks instead of those bonds, but that is not worthwhile for you, because of the additional risk.

Since SS is inflation-linked, the fair comparison is investing in long-term TIPS or I-Bonds. If you buy those, you get a guaranteed inflation-adjusted return when they mature. If you pay extra SS, you also get a guaranteed inflation-adjusted return in higher SS benefits. (You don't need to invest in specifically those bonds, but whatever bonds you do invest in give you an appropriate trade-off of risk versus return.)

Currently, the yield on a 30-year TIPS is negative, and the yield on an I-Bond is zero for 30 years but you will owe federal tax on the gain. But assuming a zero real yield, and assuming you are over the second bend point, paying an extra $214 increases your Primary Insurance Amount by $1 monthly, adjusted for inflation. Thus, if you take SS at full retirement age (67 for you), then you break even if the benefits last 214 months, which is 18 years. This may be more or less than the expected benefit time, depending on whether you are the higher-earning or lower-earning spouse, and the age difference.

Taxes also factor in. If saving the FICA tax allows you to contribute more to your 401(k) or Roth IRA, then the reduced FICA tax is a tax-deferred or tax-free benefit; otherwise, it is a taxable benefit. The increased SS will be 85% taxable when paid, which is significantly worse than a 401(k) or Roth IRA, but probably better than a taxable account since the tax on the increased SS is deferred until you take it.
Wiki David Grabiner
H-Town
Posts: 5876
Joined: Sun Feb 26, 2017 1:08 pm

Re: HSA contributions per pay period/or on own

Post by H-Town »

Thanks grabiner!
Time is the ultimate currency.
dcabler
Posts: 4482
Joined: Wed Feb 19, 2014 10:30 am

Re: HSA contributions per pay period/or on own

Post by dcabler »

BrokerageZelda wrote: Tue Dec 07, 2021 8:07 pm
TurksandCaicos01 wrote: Tue Dec 07, 2021 7:58 pm
dcabler wrote: Tue Dec 07, 2021 6:46 am
TurksandCaicos01 wrote: Mon Dec 06, 2021 7:22 pm My company is switching benefit plans and I know have the option of contributing to my HSA per pay period via a pre-tax deduction in my paycheck.

Previously I was putting in the maximum HSA contribution in post-tax money in January each year and investing it. This was then deducted from my taxes when I filed my annual federal taxes.

Now that I have another option, I'm not sure if there is a benefit to one or the other.

On one hand I can fully invest at the beginning of the year and have more time in the market. But the other option may have better tax options?

Not sure what to choose. Thanks
Be aware of potential tax penalty implications of front loading an HSA if you become ineligible for an HSA later in the year.

https://20somethingfinance.com/should-y ... ributions/

Cheers.
Why would one become ineligible mid year?
For example, losing or changing a job such that you are no longer enrolled in an eligible HDHP.
Correct! I'm currently with the first employer I've ever had with an HDHP plan with HSA eligibility. When I started working there, it was mid year and I maxed out an entire year's contribution by year's end. For me it was a pretty safe bet that I wouldn't be let go or would quit after a few months. But when January rolled around, I set it up to be spread evenly over the year to avoid any hassles. I do, however, front load my 401K and have been doing that for years - mainly because in my industry, layoffs tend to happen in the second half of the year and I wanted to layoff proof my 401K contributions. Just need to make sure the checking account has sufficient funds to get us through the first couple of months of the year.

Cheers.
Post Reply