Tax Treatment of Health Savings Accounts (HSAs) in California From BenefitsCafe.com 2018-04-24T01:42:51+00:00

Tax Treatment of Health Savings Accounts (HSAs) in California

Health Savings Accounts (HSAs) allow enrollees to save money on a tax favored basis to pay for medical expenses. A business can allow employees to open a California HSA account only after the employee has enrolled in a qualified high deductible medical insurance plan. Anthem Blue Cross of California, Blue Shield of California, Health Net of California, Kaiser, CalChoice and United Health Care of California all offer HSA compatible group health insurance plans.

Employers can use HSA compatible high deductible health insurance plans as an effective strategy to lower the cost of medical insurance in California.  HSA compatible plans offered significant cost savings during the 2008 – 2012 period.  Now, however, the cost of HSA compatible health plans has increased and non-HSA compatible plans with lower deductibles and doctor office visits, and prescription medicine co-payments available before meeting the full deductible (as the HSA compatible plans require) are less expensive.  In many cases the cost savings of HSA compatible plans has vanished.

If one is in a very high tax bracket; has very good health; and wants a tax shelter, then, an HSA compatible plan may make sense.

We do not give tax advice – see your accountant for that.  Below is a summary of information that you should consider an overview.  Do NOT base your tax planning on this information.  Consult your tax advisor and or accountant.

Modeled after individual retirement accounts (IRAs), HSA are federally tax deductible trusts or custodial accounts used to pay for qualified medical expenses. Earnings in the accounts are not taxed if used for qualified medical expenses.

Current California law (as of October 2005) does not conform to the federal HSA provisions. California tax returns start with federal adjusted gross income (AGI) and require adjustments for differences between federal and California law. According to an excellent description of this issue (California Tax Deductibility of HSA Contributions) current California law requires the following adjustments: NOTE: THIS INFORMATION IS MORE THAN 10 YEARS OLD AN MAY BE OUT OF DATE.  DO NOT RELY ON THIS INFORMATION.

  1. A taxpayer taking an HSA deduction on his federal return must increase AGI by the amount of the federal deduction on his California tax return;
  2. Interest earned on the account must be added to AGI on the California tax return; and,
  3. Any contribution to an HSA made by an employer on behalf of an employee is not excluded from income and must be added to the AGI of the employee on the employee’s California return.

Further California law does not allow tax-free rollovers from a Medical Savings Account (MSA) to an HSA. As such a California tax payer who rolls over an MSA distribution into an HSA must add the amount to AGI on the California tax return.

California Senate Bill 173, introduced by state Senator Maldonado, would generally make the California tax treatment of Health Savings Accounts similar to IRAs. Giving HSAs tax favored status in California would help assist small employers and families to lower the cost of their health insurance.