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How to set up the tax tracking type HSA Emp. (Pre-tax) for employee contributions to health savings accounts

With payroll update 21006, released on 02/11/2010, a new Tax Tracking Type called HSA Emp. (Pretax) is supported in QuickBooks. This new Tax Tracking Type can be used beginning in tax year 2010.

HSA Emp. (Pretax) is for employee contributions to a health savings account (HSA) that are made by a salary reduction arrangement through a cafeteria plan (Section 125 plan) and are not included in income as wages and are not subject to federal income tax withholding, Social Security, Medicare, or FUTA taxes. An employee deduction using this tax tracking type reports the contribution on the employee's Form W-2 in box 12 with code W beginning with the 2010 Form W-2.

Note: Your insurance policy administrator can advise you whether you should set up your employees' HSA contributions as pretax or after tax.

If prior to payroll update 21006, you set up a custom deduction payroll Item to support the employee's pretax contributions to their HSA, keep this payroll item for historical purposes, but set up a new deduction payroll item using the tax tracking type HSA Emp. (Pretax):

Before you begin, verify whether the HSA item you want to set up is a company (employer) contribution or an employee deduction. Make sure you follow the correct setup procedure.

To create a pretax employee deduction HSA payroll item:

  1. Select Lists > Payroll Item List. Select the Payroll Item button and choose New.
  2. Choose Custom Setup and select Next.
  3. Choose Deduction and select Next.
  4. Name the item and click Next.
  5. Choose the Liability account and select Next.
  6. Set the Tax Tracking Type as HSA Emp. (Pretax) and select Next.
  7. In the Taxes window, select Next.
  8. In the Calculate based on quantity window, choose Neither and select Next.
  9. Enter a Default rate and limit, if applicable. Otherwise, leave the default rate and limit blank and enter the rate and annual limit in the individual employee's Payroll Info window.
  10. Select Finish.

W-2 reporting of the employee contribution - Standard, Enhanced, and Assisted Payroll customers only:

A payroll item set up with the HSA Emp. (Pretax) Tax Tracking Type supports employee contributions and QuickBooks automatically flows the contribution to the employee's Form W-2 in box 12 with code W.

For more information about HSAs, go to the IRS website at www.irs.gov. Consult with your professional tax advisor, accountant, or attorney about your specific business or tax concerns.

Note: To report and pay the HSA Employee contribution to your insurance or plan provider, you will need to create a payroll liability check in QuickBooks. See Set up and pay scheduled or custom (unscheduled) liabilities for instructions.

To have the HSA employee deduction direct deposit directly into the a HSA account:

  1. The method described below is NOT a preferred method.  Contact your HSA provider for alternate options.  If a direct deposit is lost, using the method described below, you may be unable to trace and reverse it.
  2. Follow the steps above to create a HSA Employee payroll item.
    • Exception, Step 5 - choose an Asset or Expense account instead of a Liability account.
  3. From the Payroll Item List, create a new Addition type payroll item with a Tax Tracking type of None.
    • In the Expense account, choose the same account used when creating the HSA item.
  4. From the Employee Center, double-click to open the employee affected.  Click Payroll Info.
  5. Under ADDITIONS, DEDUCTIONS AND COMPANY CONTRIBUTIONS, add both the HSA addition and deduction items.
  6. Select the Direct Deposit button.
  7. Select Use Direct Deposit and Split Payment.  Enter the following:
    • Deposit Portion of Payment: enter the amount of the HSA to be deposited and the HSA Bank, Account and Routing information.
    • Deposit the Remainder: enter the employee direct deposit information.
  8. Select OK twice to save your changes.
  9. Next time you pay the employee, the following should be on the paycheck:
    • The HSA deduction item for the employee
    • The Addition item (created in step 2) - in the Rate column enter the HSA amount (the same amount as the HSA deduction item).
    • In the Employee Summary there should be two Deposit to transactions listed.  The one to the HSA account should match the amounts on the previous two payroll items.

Note:  At this time you cannot direct deposit any company contributions to the Employee's HSA account.

Related Articles

HSA Emp. (Taxable)
HSA Co. (Nontaxable)
HSA Co. (Taxable)
Correcting previously used HSA Employee Deductions
Set up and pay scheduled or custom (unscheduled) liabilities

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