Health Savings Accounts and Taxes
Revised February 27, 2006
HSAs have a "triple" tax advantage from a federal tax standpoint. Individuals receive full tax advantages for HSAs on their Federal Income Tax return (or through a salary reduction program in certain employer-sponsored settings) regardless of particular state's tax treatment of HSAs.
An account beneficiary may take an above-the-line deduction (i.e. the amounts may be used to determine the individual's adjusted gross income before any itemized or standard deductions are considered) for contributions made to an HSA during any month of the individual's taxable year that the individual is eligible. The permitted deduction cannot exceed the sum of the "monthly limitations" for such months. In 2006, the monthly limitation for any month is 1/12th of the following amounts:
- For those with single coverage on the first day of the month, the lesser of the annual deductible under the HDHP or $2,700.
- For those with family coverage on the first day of the month, the lesser of the annual deductible under the HDHP or $5,450.
Funds in an HSA grow on a tax-deferred basis, and distributions from an HSA are tax-free so long as the funds are used for qualified (as defined by Section 213d of the IRC) health care expenses.
How does state tax treatment of HSAs differ from federal tax treatment?
HSAs (and the enabling legislation) are federal. As a federal program, each state decides whether to: a) comply with the federal guidelines, or; b) establish their own state guidelines regarding the tax treatment of HSAs. As a result, some income that may be tax-free at the federal level may not be tax-free at the state level.
Many states harmonize their tax treatment with the federal government. Those states include Arizona, Arkansas, Colorado, Connecticut, Delaware, Georgia, Hawaii, Idaho, Iowa, Indiana, Kansas, Kentucky, Louisiana, Maryland, Missouri, Mississippi, New York, Montana, Nebraska, New Mexico, Oklahoma, North Carolina, North Dakota, Pennsylvania, South Carolina, Oregon, Rhode Island, Virginia, Utah and Vermont.
Other states, however, treat HSAs differently from the federal government, at least for tax purposes. The following states have indicated that legislation must be passed at the state level before HSAs receive a tax benefit at the state level: California, Illinois, Maine, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, Ohio, Washington DC, Wisconsin, West Virginia and Tennessee. New Hampshire and Tennessee do not tax income, but do tax dividends and interest. Alabama has not indicated their position regarding state-level tax benefits for HSAs.
Finally, some states are not affected by federal income tax guidance vis-à-vis HSAs: those states include Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.
About Healthia
Healthia was founded in 2005 to provide integrated comparison-shopping information on health care products and services, doctors and health plans to empower the drive towards Consumer-Driven Health Care. Its co-founders are Chini Krishnan, founder of public-key infrastructure (PKI) validation company Valicert (which merged with Tumbleweed Communications), and Shankar Srinivasan, a member of the founding tem of Healtheon/WebMD. Healthia is a privately-held company headquartered in Santa Clara, CA, funded initially by Bessemer Venture Partners. Insurance brokers or banks that are interested in partnering with Healthia can visit http://www.healthia.com/brokercenter or http://www.healthia.com/bankcenter for more information. For further information, call Healthia toll-free at 877-296-3805 or visit the Healthia web site at http://www.healthia.com.
