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State Conformity to the Federal Tax Treatment of HSAs


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State Conformity to the Federal Tax Treatment of HSAs --

The TRHCA of 2006 made changes to the HSA rules, which are generally effective for taxable years beginning after December 31, 2006. A State's conformity with the Code will indicate whether the State conforms to the recent changes to the new HSA new rules that follow:

• Modifies the limit on contributions to HSAs, so that it is not limited to the annual deductible of the high deductible health plan ("HDHP"); instead, contributions would be limited only by indexed dollar amount ($2,850 self-only and $5,650 family for 2007; $2,900 self-only and $5,800 family for 2008).

• Allows individuals who become covered by a HDHP after January to contribute up to the full annual limit, even if they were only eligible individuals for a portion of the taxable year.

• Permits an individual to transfer the balance remaining in his or her FSA or HRA account as of September 21, 2006 (or, if less, the balance on the date of the transfer) to an HSA. The transfer must be made before January 1, 2012.

• Requires the Secretary of Treasury to announce the cost-of-living adjustments applicable to HSAs by June 1 of each year. This change is effective for tax years beginning after 2007.

• Allows coverage under a health FSA during the "2-1/2 Month Grace Period" to be disregarded for eligible individuals who have a zero balance in their HSA at the end of the previous calendar year.

• Allows employers to make contributions to HSAs on behalf of non-highly compensated employees in higher amounts (or higher percentages of deductibles) than to highly compensated employees without violating the comparable contribution rules.

• Allows individuals to make a one-time distribution to rollover amounts from an IRA to an HSA, subject to the HSA contribution limit.

In general, a majority of States conform their state income tax laws to the federal income tax rules set forth under the Internal Revenue Code of 1986, as amended (the "Code"). A number of these States incorporate the Code by reference, conforming to any and all amendments made to the Code. Other States conform to the Code as of a specified date. In this instance, a State will generally not conform to amendments made to the Code after this specified date. Only until the respective State legislature updates the date of conformity with the Code under the State's statute will the State conform to recent changes made to the federal tax laws. As a practical matter, however, unless a State amends its tax forms and instructions requiring taxpayers to, for example, "add back" HSA contributions that are otherwise deductible or excludible under federal law, it is unlikely that the State will pursue the collection of tax on these unreported amounts.

As a consequence, there are several states in which the state tax consequences of HSA participation differ from the federal tax consequences (for example, where HSA employer contributions that are excludable for federal tax purposes are required to be included in income, where interest earned on the HSA is taxed, or where deduction for state tax purposes is not available).

See Chapter 8 and Appendix G (a 35 page chart) in the Health Savings Account Answer Book (4th Edition, in Press) for more specific information regading whether a particular State conforms to the Code, and the date upon which conformity is enumerated in the State's statute (if any).

My understanding (as of SEPTEMBER 28, 2007) is as follows:

Alabama -- Generally No--Fed Tax / No--TRHCA '06

Arizona -- Yes--Fed Tax / No--TRHCA '06

Arkansas -- Yes--Fed Tax / No--TRHCA '06

California -- No--Fed Tax / No--TRHCA '06

Georgia -- Yes--Fed Tax / No--TRHCA '06

Indiana -- Yes--Fed Tax / No--TRHCA '06

Iowa -- Yes--Fed Tax / No--TRHCA '06

Massachusetts -- Yes--Fed Tax / No--TRHCA '06

Minnesota -- Yes--Fed Tax / No--TRHCA '06

New Jersey -- No--Fed Tax / No--TRHCA '06

Ohio -- Yes--Fed Tax / No--TRHCA '06

Oregon -- Yes--Fed Tax / No--TRHCA '06

Vermont -- Yes--Fed Tax / No--TRHCA '06

Wisconsin -- Yes--Fed Tax / Yes--TRHCA '06: Senate Bill 2, brings Wisconsin into alignment with federal law and tax code provisions in most states. Wisconsin was one of only five states that failed to permit tax deductions for HSAs. S.B. 2 passed the Senate Jan. 20, 2011, by a vote of 20-13. The measure won support in the House later in the day by a vote of 66-28.

ALL OTHERS -- Yes--Fed Tax / Yes--TRHCA '06

STATES WITHOUT PERSONAL INCOME TAXES: Alaska, Florida, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

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