Health Savings Accounts and Flexible Spending Accounts are common tax savings vehicles. This tech tip will walk through entering both types of tax-advantaged accounts in TOTAL.
Health savings accounts can be invested and carried over year to year without limits. We recommend adding HSA as an asset. Interest earned on HSA is tax free, as are withdrawals for qualified medical expenses. After age 65, withdrawal can be made without penalty for non-qualified medical expenses, but would be taxable as ordinary income.
1. Add HSA to assets.
Enter the name, group, type and owner. To err on the conservative side, we suggest using the asset type for the HSA as “Tax Deferred” rather tax “Tax Free.” Tax free provides no taxation on withdrawals, whereas tax deferred treats withdrawals as ordinary taxable income. Enter the current balance and rate of return.
2. Enter contributions to the asset.
Simply add the contribution under the additions section for the HSA asset.
3. Adjust income.
Personal contributions to HSA accounts are either made as a payroll deduction or as a salary reduction based on the type of plan. For HSA payroll deduction plans, contributions are included in wages and are subject to Social Security and Medicare tax but not to ordinary income tax. For HSA section 125 cafeteria plans, contributions are not considered wages and are not subject to taxes.
Payroll deduction plans - pre-tax contributions:
Use the “Adjustments to Federal Income” item under Taxes and Tax Details to capture the adjustment for the HSA contribution. Enter the contribution as a negative under the “Tax Report” column only. Use the "Future Changes" table to stop the adjustment when the client is no longer contributing to the HSA.
Section 125 cafeteria plans – tax-free contributions:
Use the flexibility of the data input income to reduce the amount of income for tax reporting purposes. In TOTAL Online, select the “Enter Amount Details” checkbox for Earned Income. This will display multiple fields for earned income. Enter the after-contribution salary and wages in the “Tax Report” field, and the full income in the “Cash Flow” input.
Flexible spending accounts require all contributions must be used in the year of the withholding. For FSA, we suggest accounting for the contribution and earning reduction. We do not recommend entering an FSA as asset due to the fact that it cannot be carried over year-to-year like an HSA. Any contributions that are not used by the year-end are forfeited.
1. Reduce the clients taxable earned income.
Contributions to FSA are tax-free. To capture this, we need to reduce the client’s salary and wages for tax purposes. Use the flexibility of the data input income to reduce the amount of income for tax reporting purposes. In TOTAL Online, select the “Enter Amount Details” checkbox for Earned Income. This will display multiple fields for earned income. Enter the after-contribution salary and wages in the “Tax Report” field, and the full income in the “Cash Flow” input.
2. Capture the contribution expense.
To view the contributions as part of the client’s expenses, enter new expense item under “Personal Expenses” with the amount of the contribution.
If your client does not need to see the income and expense related to the FSA separated out, you could also simply reduce both the “Tax Report” and “Cash Flow” amount of earned income and skip the step of adding the contribution to personal expenses.