Certified Financial Consultant (CFC) Practice Exam

How do employer contributions to Health Savings Accounts affect an individual's taxable income?

1. They are added to taxable income

2. They are subject to self-employment tax

3. They are not included in taxable income

4. They are taxed at the employer level only

The correct answer is: They are not included in taxable income

Employer contributions to Health Savings Accounts (HSAs) are not included in an individual's taxable income. This means that when an employer contributes to an employee's HSA, that amount is excluded from the employee's gross income for tax purposes. This tax advantage makes HSAs an effective tool for saving for medical expenses, as contributions grow tax-free and withdrawals for qualified medical expenses are also tax-free. This arrangement incentivizes both employer and employee contributions toward health care savings without creating an immediate tax burden for the employee. The funds remain tax-deferred until they're withdrawn for qualified health-related expenses. Overall, this feature enhances the appeal of HSAs as a tax-efficient method of managing healthcare costs.