Employer contributions to a HSA made through a Section 125 plan - income for 401k plan purposes?

Grrr - this seems sticky. Employer contributions to the HSA are a "qualified benefit" under the Section 125 proposed regs. (See 1.125-1(3)(J)). And under the W-2 instructions, excerpt below, they would need to be included in Box 12 with a code W. Assuming for the moment that the contributions, when made, are "reasonably" excluded from the employee's income, is this considered a Section 125 "deferral" which is added back in as compensation under the terms of the plan? I'm having trouble coming up with a definitive answer on this. Does the fact that 1.125-1(3) contains the language that the term "qualified benefit" means ..."any benefit attributable to employer contributions"... mean that it is treated as a deferral that is added back in? Anyone gotten a CPA decision on this question before? Thanks. 

Health savings account (HSA).

An employer's contribution (including an employee's contributions through a cafeteria plan) to an employee's HSA is not subject to federal income tax withholding or social security, Medicare, or railroad retirement taxes (or FUTA tax) if it is reasonable to believe at the time of the payment that the contribution will be excludable from the employee's income. However, if it is not reasonable to believe at the time of payment that the contribution will be excludable from the employee's income, employer contributions are subject to federal income tax withholding, social security and Medicare taxes (or railroad retirement taxes, if applicable), and FUTA tax, and must be reported in boxes 1, 3, and 5 (use box 14 if railroad retirement taxes apply); and on Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return.

You must report all employer contributions (including an employee's contributions through a cafeteria plan) to an HSA in box 12 of Form W-2 with code W. Employer contributions to an HSA that are not excludable from the income of the employee must also be reported in boxes 1, 3, and 5. (Use box 14 if railroad retirement taxes apply.)

An employee's contributions to an HSA (unless made through a cafeteria plan) are includible in income as wages and are subject to federal income tax withholding and social security and Medicare taxes (or railroad retirement taxes, if applicable). Employee contributions are deductible, within limits, on the employee's Form 1040 or 1040-SR. For more information about HSAs, see Notice 2004-2, Notice 2004-50, and Notice 2008-52. Notice 2004-2, 2004-2 I.R.B. 269, is available at IRS.gov/irb/2004-02_IRB#NOT-2004-2. Notice 2004-50, 2004-33 I.R.B. 196, is available at IRS.gov/irb/2004-33_IRB#NOT-2004-50. Notice 2008-52, 2008-25 I.R.B. 1166, is available at IRS.gov/irb/2008-25_IRB#NOT-2008-52. Also see Form 8889, Health Savings Accounts (HSAs), and Pub. 969.

https://www.irs.gov/instructions/iw2w3#en_US_2021_publink1000308298

18 hours ago, Belgarath said:

Assuming for the moment that the contributions, when made, are "reasonably" excluded from the employee's income, is this considered a Section 125 "deferral" which is added back in as compensation under the terms of the plan? I

I think that the contributions are treated the same way as employer funded premiums for group health insurance.  Its paid for by the employer and it isn't considered income to the employee.  

Thanks. That's my opinion as well, although I don't feel overly confident about it!  It at least seems reasonable...

17 minutes ago, Belgarath said:

Thanks. That's my opinion as well, although I don't feel overly confident about it!  It at least seems reasonable...

I'm not 100% confident either.  That said, I have never seen someone include it, and I have read writings from other benefits practitioners and CPAs, but without a citation I could hang my hat on.  What makes it more complicated is that my understanding is that it is only treated this way if its within a 125 plan.  Otherwise, its included but deductible.  Which is obviously different than excluded.

I think we need @Ilene Ferenczy or @S Derrin Watson to chime in and set us straight 

2 thoughts on this subject.  My two cents... take it for what it is worth.....

1.  FIS is doing an Advanced Pension Conference on Feb 1-3, 2022 and one of the topics is Recommend the right definition of compensation for a particular plan sponsor.  so you may not get a response from Derrin or Ilene this week.   LOL

2.  I did my own analysis on this a few years ago as an CPA was questioning the employer about Section 125 deferrals and whether it was to be included as compensation for profit sharing purposes.  The CPA wanted it out of the calculation.  The plan was w-2 comp with deferrals added back in.  I concluded that deferrals to a section 125 plan was added back and used for profit sharing compensation.  See EOB 2021  1A.118 for discussion on "gross up" compensation.  

Again, my 2 cents....

Thanks - not questioning whether Section 125 deferrals are added back in. In this plan, they are. The question is whether EMPLOYER contributions to the HSA through the 125 plan are considered deferrals to be added back in to plan compensation.

1 minute ago, Belgarath said:

Thanks - not questioning whether Section 125 deferrals are added back in. In this plan, they are. The question is whether EMPLOYER contributions to the HSA through the 125 plan are considered deferrals to be added back in to plan compensation.

Ah, I see the difference that you are questioning..   yeah.... good luck with that....   

14 hours ago, RatherBeGolfing said:

I think that the contributions are treated the same way as employer funded premiums for group health insurance.  Its paid for by the employer and it isn't considered income to the employee.  

Belgarath, I have not looked at this before, but would agree with RatherBeGolfing. They are neither W-2 wages nor 125 deferrals added back to W-2 wages, so I don't think would be included.

Belgarath,

You didn't specify what type of pay you are asking about here: 415 pay (which in addition to 415 limits are automatically used for certain other purposes - HCE determination, top heavy, etc), pay used to determine allocations or benefits (which must be defined in the plan document), or pay for nondiscrimination (which can be any definition that meets 414(s) as specified in the plan document). 

For 415 purposes, a section 125 elective contribution (which must be included in 415 pay, for example) must be an amount that would be included in income if the participant did not elect a qualified benefit under the cafeteria plan. (See 415(c)(3)(D)(ii)). 

Employer non-elective contributions (a/k/a "flex credits") to a cafeteria plan used to pay for qualified benefits under the plan are typically not includible in 415 pay. However, if the section 125 plan fails nondiscrimination testing, the entire value of the benefits under the cafeteria plan with the greatest value to the HCE or key employee (even if they were not actually elected by the employee) would be includible in gross income and would therefore be includible in 415 pay - and this usually includes  benefits bought with employer non-elective contributions (a/k/a "flex credits") that would have been non-taxable to the employee if the cafeteria plan test passed nondiscrimination testing.  If an HCE was a member of a discriminatory self-insured medical reimbursement plan that failed 105(h) testing (and was part of the cafeteria plan), the HCE's excess reimbursement under that plan would be considered a taxable benefit under the cafeteria plan (which would mean that the excess would be includible in 415 pay - even if it was attributable to employer non-elective contributions used to buy medical benefits under the cafeteria plan). If the participant was both an HCE in a failed 105(h) test, and an HCE/key employee in a failed 125 test, you wouldn't have to include the same amount in income and 415 pay twice.     

Thanks for the input.