FAFSA Treatment of Employer-Sponsored HSA vs. Individual HSA

[BelknapPoint]

I think it is a situation where FAFSA formula didn’t keep up with the tax code . HSAs were a vehicle where the employee got to park some pre-tax income. There were limitation and I’m not sure employers contributed (mine didn’t). It was also ‘use it or lose it’ for that 12-15 months, so there were no huge contributions ($5000 limit?) and no carry over. HSAs are now more of a savings vehicle where you can park some pretax income and the employer can also contribute funds to the HSA that are not considered income. It’s more like a 401k with the employee’s pretax contributions are added back to the income but the employer’s contribution doesn’t count in the FAFSA formula.

It sounds like you may be conflating HSAs with FSAs, which both still exist but have very different rules. FSAs (Flexible Spending Accounts) have many of the attributes you describe above, most importantly, the “use it or lose it” limitation.