What happens to an employee's payroll contribution to an HSA without a Section 125 Plan?

When an employee makes payroll contributions to a Health Savings Account (HSA) without a Section 125 Plan, those contributions are considered taxable income. This means that the employee must pay income taxes on the amount contributed to the HSA, and it will be included in the employee’s gross income for tax purposes.

In contrast, contributions made through a Section 125 Plan, often referred to as a cafeteria plan, allow employees to make pre-tax contributions, thereby reducing their taxable income. Without this option in place, the financial benefit of tax-free contributions is not available. Thus, contributions made directly from payroll would not be tax-exempt and would simply add to the taxable income, which can impact the overall tax situation for the employee.

The other options presented are not applicable in this context. Non-taxable contributions would only apply if the contributions were made through a qualified Section 125 Plan. Tax deductions might be possible, but only if the individual itemizes deductions and meets certain criteria, rather than being applied directly at the payroll level. Ignoring the contributions for tax purposes is not an option as all income is generally subject to taxation unless expressly excluded by law.