In the Forbes article linked below, I question whether the author is overstating the impact of a lower federal tax allowance when an HSA contribution (or under any voluntary income deferral contribution) gets added back to income under FAFSA or PROFILE. I ran many competing scenarios through the College Boards EFC calculator (running almost identical scenario with the exception of making an IRA contribution or not). The increase in EFC under both IM and FM is increased by roughly 1/5 of the 25% the author claims. Where the author claims “So, for example, making a $6,650 HSA contribution will affect your child’s need-based aid eligibility by about $1,663 per year”, when I run the numbers through EFC calculator I come up with an increase in EFC of $323 under IM and and increase of $432 under FM.
I tried to contact the author of the article, but he unfortunately passed away August 24, 2018.
Trying to understand the article and your comments. The income should be the same in both cases (whether you contribute to the HSA or not) because HSA contributions get added back in. However, if you contribute to an HSA, your taxes will be lower. Since the aid formulas subtract taxes from income, there will be more income available to pay for a college if you contribute to the HSA (this is also true if you contribute to a 401K type account). Now I don’t believe your EFC will increase by that difference. It would increase by the difference times how much each formula counts income. Is that what you are saying is wrong with the article?
BTW - $323 is about 20% of $1,663 and $432 is about 25% of $1,663. That is curiously the difference in the aid formulas for a child’s assets. No idea if that is being used here though.
Thank you, privateID - Yes, that was the thrust of my post, that I was doubting the accuracy of the article and do not believe my EFC would increase by $1,663 as claimed in the article if I made a $6,650 HSA contribution - I am hoping others who have an informed perspective would weigh in.
What I know: by making a $7000 HSA contribution for 2019, I would reduce my Federal tax liability by $840 (+ a $400 reduction in state tax).
What I think I understand: By making the HSA contribution, I will lose the ability to claim $840 as an allowance for U.S. Income Taxes paid on both FAFSA and PROFILE which would effectively increase my income considered by $840 applied at a rate of between 22-47% for EFC so would increase our EFC by $185 - $395.
If this is accurate, the HSA contribution is a no-brainer, since I would definitely save $840+$400 in taxes, but increase our EFC by somewhere between by $185 - $395.
It is my understanding that what you are saying is correct. It is also true for tax-defered accounts as you mention as well. The article was in error about that point as well stating “employer contributions to retirement plans are not added back in aid formulas”. That is true, but employee contributions are added back in.
If someone knows otherwise or can confirm this will chime in.
As long as your marginal change in FA for an extra dollar of income is less than 100% the HSA is still a good idea. The change in FA reduces the tax advantage of the HSA, but it is still > 0.
This reminds me of a time that my dad said that he didn’t want to win the lottery because he didn’t want to pay that much in taxes. I just shook my head and walked away.
Anyone making the max HSA contributions is probably not in the FA (fafsa only) weeds, right? The $7K number (@parentsofsboys is over the max, IIRC? Even maxing the HSA is luxury for most, I suspect? It is all pretty abstract even for the Forbes readers.
$7,000 is not over limits for 2019. For an individual with family coverage, the 2019 health savings account (HSA) contribution limit is $7,000, up from the recently reset $6,900 limit for 2018.
You have several different threads about your pretax contributions to this or that. I’m going to give you my opinions.
You need to figure out how much you can pay for college each year on your income…which (I think you understand) will include the pretax contributions. Then go from there.
Your oldest kiddo is three years away from college. Assuming he starts in fall 2021, the income year will be 2019 for his first FAFSA and Profile forms for the 2021-2022 academic year.
You need to understand…a LOT can change in the three years before your oldest child starts college.
Financial aid policies and formulas DO change. What you see now may not be what is the real deal when your oldest kiddo starts college.
Costs to attend colleges will most definitely rise.
Life could happen. You could lose your job, or you could get a huge raise or bonus. Right? It is very good to try to get a handle on what YOU think you can pay, but these other things are not in your control.
If you have a medical issue, you will be very happy you have your health insurance and your H.S.A. account. Do what you think is right for THAT...and leave college out of the equation.
You sound like you are trying your best to leverage your income, contributions to tax sheltered retirement, contributions to H.S.A. accounts to increase or at least not decrease need based financial aid. You don’t even know where your kids will be attending college...or if they even will be doing so. One might decide to become an electrician or HVAC expert, or a plumber....all excellent professions, well compensated, and we need them!
You are putting the cart before the horse, in my opinion.
If your kids get accepted at colleges that guarantee to meet full need for all students, maybe this will matter...a bit. But your income puts you way out of range for any federally funded need based aid. So...it’s institutional aid you would be wanting. At schools that don’t guarantee to meet full need for all, the only guaranteed aid at your income level is the Direct Loan, which is $5500 for freshman year.
So…what do I suggest?
Encourage your kids to do their best as high school students. This includes getting their best shot GPA and SAT or ACT scores. These will open the doors to admissions potential as well as merit aid potential.
I forget what state you are from...but spend some time learning about your instate public universities. For example, if you are from NY, even at your income level, your kids would qualify for the Excelsior which would pay instate tuition at the CUNY or SUNY schools.
Be realistic about your finances...and make sure (when the time comes) that your kids understand your budget. There is no point in applying to $70,000 plus (by the time your kids get there...it might be $80,000 a year) colleges if you have run the net price calculators (not now...do this in September of your kid’s senior year in HS) and the net costs you see are too high.
Sure…you can look at those NPC results now, but view them as a very gross estimate.
@Sybylla Not sure I agree with that statement. Sure, if one was contributing to the HSA for future years I agree many receiving FA aren’t able to max out all possible tax-advantaged accounts. However, I have contributed the max to an HSA the last couple of years because I knew I would have significant medical bills and planned to pay for them with contributions to the HSA for the given year. Of course it’s better to let the money sit in the HSA and pay out of pocket, but I was not in the financial position to do that. My family also receives financial aid.
If you don’t make the HSA contribution, your income will be higher for FAFSA anyway. Your taxes will be higher so you’ll get a bigger ‘deduction’ but off a higher income.