Without a section 125 plan in place, a payroll contribution to an HSA would be considered what?

• A. It would be considered taxable income to the employee
• B. It would be tax-exempt
• C. It would be subject to only payroll taxes
• D. It would be deductible for the employer

Answer: (A)

HSAs gain tax-advantaged treatment when contributions are made through a Section 125 cafeteria plan, i.e., a pre-tax payroll deduction. If there’s no 125 plan in place, a payroll deduction for an HSA is treated as part of your wages. That means the amount is included in your gross income for the year and is subject to federal income tax withholding (and any state tax, if applicable) as well as Social Security and Medicare taxes. So it’s not tax-exempt just because it’s going toward an HSA; the deduction reduces take-home pay but the contributed amount is taxed as ordinary income in that year. The other options don’t fit because they imply tax-exempt treatment, payroll-only tax treatment, or an employer deduction effect, none of which applies without a Section 125 plan.