Without a Section 125 Plan in place, what would happen to an employee's payroll contribution to an HSA?

When an employee contributes to a Health Savings Account (HSA) without a Section 125 plan, these contributions do not receive the tax advantages provided under such plans. A Section 125 plan, also known as a cafeteria plan, allows pre-tax payroll contributions, meaning the funds can be deducted from an employee’s gross income before taxes are applied.

In the absence of a Section 125 plan, contributions made by the employee to their HSA are made with post-tax dollars. This means that the contributions are included in the employee's taxable income, thereby increasing their taxable income for the year. Consequently, the employee would not benefit from the pre-tax status of these contributions, resulting in them being considered taxable income.

It's important to recognize that while HSAs offer tax advantages (such as tax-free growth and tax-free withdrawals for qualified medical expenses), the immediate payroll deductions from paychecks require a Section 125 plan to ensure those contributions are made pre-tax.