Are HSA contributions through payroll deduction excluded from Medicare wages? Tax question about W-2 reporting

This is a common point of confusion! HSA contributions made through a Section 125 cafeteria plan (salary reduction) are indeed excluded from federal income tax wages, Social Security wages, AND Medicare wages. If your wife's employer is including HSA contributions in her Medicare wages (Box 5 of W-2), that appears to be incorrect. HSA contributions made through payroll deduction under a proper Section 125 plan should be excluded from: - Box 1 (Federal income tax wages) - Box 3 (Social Security wages) - Box 5 (Medicare wages) The employer might be making a payroll system error. It's fairly common, especially since some other pre-tax deductions have different rules. For example, 401(k) contributions are excluded from income tax but still included in Medicare wages.

After struggling with a similar W-2 issue last year where my employer misreported some pre-tax deductions, I found a really helpful tool called taxr.ai (https://taxr.ai) that analyzes your tax documents and spots these kinds of errors. It actually flagged that my HSA contributions were incorrectly included in my Medicare wages just like your wife's situation. What I liked is that it explained exactly what was wrong and gave me the specific IRS references to take back to my HR department. It saved me from having to do all the research myself or hope the HR person knew what they were talking about. They even have a feature that can generate a letter to send to your employer explaining the error.

I just wanted to follow up and say I tried taxr.ai after seeing this thread. I was skeptical at first, but it actually identified that my employer had been incorrectly including my transit benefits in my Medicare wages for the past two years! The tool generated a detailed explanation with IRS references that I emailed to our payroll department. They acknowledged the error and are issuing a corrected W-2. I'm getting back almost $90 in overpaid Medicare taxes that I wouldn't have known about otherwise.

If you're having trouble getting your employer to fix this W-2 issue, you might want to try Claimyr (https://claimyr.com). I had a similar situation last year with incorrectly reported HSA contributions, and after weeks of my employer not responding, I needed to talk to someone at the IRS. We all know how impossible it is to get through to the IRS phone lines (I tried for days), but Claimyr got me connected to an actual IRS agent in about 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c. The agent confirmed the reporting error and explained exactly what forms my employer needed to file to correct it.

I need to apologize and correct myself. After calling the IRS for 3 hours yesterday and getting nowhere, I decided to try Claimyr out of desperation. I was completely wrong - the service actually works exactly as described. Got connected to an IRS agent in about 35 minutes while I was cooking dinner. The agent confirmed that HSA contributions through a Section 125 plan should absolutely be excluded from Medicare wages and explained how to request a W-2c from my employer. Sorry for being so skeptical earlier!

If your employer won't correct the W-2, you can file Form 8275 "Disclosure Statement" with your tax return to explain the discrepancy. You would calculate and pay the correct amount of tax (as if the HSA contribution was properly excluded from Medicare wages) and attach the form explaining why your tax calculation doesn't match the W-2. This lets you pay the correct amount without waiting for a corrected W-2, and it also documents your position in case of questions later.

For anyone who comes across this later - I work in payroll and this is 100% an employer error. HSA contributions through a Section 125 cafeteria plan are excluded from ALL FICA taxes (both Social Security and Medicare). The confusion sometimes happens because certain pre-tax deductions have different rules: - 401(k)/403(b) contributions: Excluded from income tax but INCLUDED in FICA (Medicare/SS) - HSA contributions: Excluded from income tax AND FICA when made through a Section 125 plan - Health insurance premiums: Excluded from income tax AND FICA - Dependent care FSA: Excluded from income tax AND FICA - Transit benefits: Excluded from income tax AND FICA up to monthly limits

This is exactly the kind of payroll error that happens more often than people realize! As someone who's dealt with similar W-2 discrepancies, I'd recommend taking a systematic approach: 1. First, gather documentation showing your wife's HSA contributions were made through payroll deduction under a Section 125 plan (this should be in her benefits enrollment materials or employee handbook) 2. Contact the payroll department with specific reference to IRC Section 125 and Publication 969, which clearly state HSA contributions through cafeteria plans are excluded from ALL payroll taxes including Medicare 3. Request they issue a Form W-2c (corrected W-2) - they're required to do this once they acknowledge the error 4. If they're unresponsive, you have options like filing Form SS-8 with the IRS to get an official determination, or using the adjustment method others mentioned on your tax return The good news is this type of error is usually straightforward to fix once you get the right person's attention. Many payroll systems have HSA coded incorrectly by default, especially at smaller employers or government agencies that don't process many HSA elections.

Just wanted to share my experience with this exact same issue! I'm an HR manager at a mid-sized company and we actually discovered we had been making this mistake for about 18 months before our payroll vendor caught it during an audit. What happened was our payroll system had HSA contributions configured as "pre-tax for income tax only" instead of "pre-tax for all taxes including FICA." It's a surprisingly common setup error because the system defaults aren't always correct, and many payroll administrators don't realize there's a distinction. When we discovered the error, we had to issue W-2c forms to about 40 employees and process refunds for the overpaid Medicare taxes. The total overpayment per employee wasn't huge (usually $30-80 depending on their HSA contribution amount), but it was definitely real money that people deserved back. If anyone is dealing with an unresponsive employer on this issue, you might mention that the employer also owes matching Medicare tax refunds to the IRS - so they actually have a financial incentive to fix it properly rather than just ignoring it. That usually gets their attention pretty quickly!

As a former payroll specialist who dealt with these Section 125 configuration issues regularly, I'd recommend being very specific in your initial communication with HR/payroll. Don't just say "my W-2 is wrong" - that could mean anything and often gets put in a pile. Instead, try something like: "My HSA contributions made through payroll deduction under our Section 125 cafeteria plan are incorrectly included in Box 5 (Medicare wages) on my W-2. Per IRS Publication 969 and IRC Section 125, these contributions should be excluded from all FICA taxes including Medicare. This appears to be a payroll system configuration error that may affect other employees as well." The key phrases that usually get immediate attention are "Section 125 cafeteria plan," "IRS Publication 969," and especially "may affect other employees." That last part is crucial because it signals this could be a systemic issue requiring broader correction, which makes it a priority for the payroll department rather than a one-off employee complaint. Also, if you have access to your pay stubs, include one that shows the HSA deduction coded as pre-tax. This gives them concrete documentation to reference when they're troubleshooting their system setup.