NON-CONFORMING STATES FOR HSA PURPOSES(please add info on state laws/rules)

[Gary Lesser]

It is my understanding that the following states do not conform to the IRC for HSA purposes at this time (but see posts below):

1. Alabama (doesn't use Federal definintion)

2. Arkansas (doesn't use Federal definintion) [Now Conforms, see below]

3. California (HSA legislation likely in 2005, failed 2004)

4. Kentucky (doesn't yet conform)

5. Maine (may have an add back provision)

6. Massachussetts (now conforms, see discussion below)

7. Minnesota (doesn't yet conform)

8. Mississippi (doesn't yet conform)

9. New Jersey (doesn't yet conform; but does have exemption for Archer MSA)

10. Pennsylvania (now conforms, see below)

11. Wisconsin (doesn't yet conform)

//END LIST//

[Guest chloe]

We just learned that Iowa has a problem with after tax contributions.

Arkansas just changed their law last Friday to allow pre-tax contributions and interest.

[Guest chloe]

I don't have much info on Iowa. I'm told that HSA contributions made by an employer through a cafeteria plan are not included in income for state tax purposes, but HSA participants can't take a state tax deduction for amounts contributed on an after-tax basis.

As for Arkansas, the governor signed into law HB1064 on February 11, 2005. It became Act 94. It adds a new section (26-51-453) titled Health Savings Accounts and states: "A health savings account is exempt under this chapter unless it no longer meets the requirements of subsection (a) of this section." Subsection (a) adopts the federal sections allowing a deduction from income for amounts deposited inot an HSA. This is brand new, but the law was retroactive to tax years beginning on or after January 1, 2004. They even included an emergency clause specific to HSAs.

[Gary Lesser]

Thanks, chloe.

Arkansas now conforms to federal law for HSA purposes.

See House Bill 1064, attached (pdf)

ARHB1064.pdf

[Guest chloe]

Kentucky has just amended their tax code to conform to the federal definitions. Beginning with tax years on or after January 1, 2005, HSA contributions and interest are exempt from taxation as income in Kentucky. (HB 272 signed by Governor on 3/18)

[Guest jamescagney2000]

Are you sure about Iowa? Do you have a ref # or ruling?

Please note: Most of the resources on the internet that summarize the HSA treatment by States are out of date!

[Guest jamescagney2000]

Wisconsin.

For companies with HSA clients in Wisconsin, I have attached the link and text of the steps needed to account for HSA contributions for 2004 tax returns. I used to provide our HSA state tax guide free to people, until they copied it word for word and put it on their own website. Needless to say, my guide is no longer available to the public.

JIM

http://www.dor.state.wi.us/taxpro/news.html#health

Health Savings Account

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Public Law 108-173), was enacted December 8, 2003. This federal Act amended the Internal Revenue Code (IRC) and provided for the establishment of health savings accounts.

For tax years beginning in 2004, Wisconsin generally follows the IRC as amended to December 31, 2002. Because the federal provisions in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 relating to health savings accounts were enacted during 2003, they do not apply for Wisconsin for taxable years beginning in 2004.

Effect of Wisconsin Not Following 2003 Federal Law Changes

All federal provisions relating to health savings accounts do not apply for Wisconsin. For example:

* A deduction is not allowed for the amount contributed to a health savings account for an individual.

* Earnings on the health savings account are taxable to the individual.

* Amounts distributed from the health savings account are not taxable to Wisconsin, regardless of whether or not the amount is used to pay medical expenses.

* Medical expenses paid with a distribution from a health savings account are allowed in the computation of the Wisconsin itemized deduction credit.

* A rollover from an Archer medical savings account to a health savings account results in a taxable transaction.

* Amounts contributed by an employer to a

health savings account for an employee are taxable wages to the employee.

* Amounts contributed to a health savings account pre-tax by an employee under sec. 125, IRC (cafeteria plan), are taxable wages for Wisconsin.

Employer Must Notify Employee on W-2 Wage Statement

Contributions to a health savings account that represent additional wages to an employee for Wisconsin purposes can be reported to employees by either:

* including the amount that is taxable for Wisconsin purposes (but not taxable for federal purposes) in Box 16 of the 2004 Form W-2, or

* providing employees with a supplemental "Wisconsin only" 2004 Form W-2 with the taxable health savings account benefits shown in Box 16.

Where to Adjust for Differences Between Wisconsin and Federal Law

Individuals should use Wisconsin Schedule I (titled "Adjustments to Convert 2004 Federal Adjusted Gross Income and Itemized Deductions to the Amounts Allowable for Wisconsin) to adjust for differences between the Wisconsin and federal income tax treatment of health savings accounts.

The 2004 Schedule I will be available on the Department's Internet web site about November 1,

[Gary Lesser]

It is my understanding that the following states do not entirely conform to the IRC for HSA purposes [AS OF JUNE 30, 2005]

1. Alabama

2. California (see following posts)

3. Maine

4. Massachussetts

5. Minnesota (see following posts)

6. New Jersey

7. Pennsylvania (see next message)

8. Wisconsin (see prior post)

//END LIST//

[Gary Lesser]

Pennsylvania: Governor Rendellybelly Signs Health Savings Measure Stripped of Tax Breaks for Contributions

Interest income earned by health savings accounts and withdrawals used to pay for eligible medical or dental expenses will be exempt from Pennsylvania state personal income tax, under legislation (H.B. 107) signed by Gov. Edward G. Rendell (D) July 14.

Contributions to the accounts will be taxable, as a result of a last-minute Senate floor amendment. Earlier versions of the bill would have allowed employers and individuals to deduct contributions to health savings accounts from their income subject to the state personal income tax.

The legislation extends state tax breaks to health savings accounts that comply with the federal tax code, which requires them to be coupled with a high-deductible individual or group health insurance policy. Those policies have an annual seductible of at least $2,000 and require out-of-pocket expenses of up to $10,000 for a family before comprehensive health insurance coverage begins to apply.

The Pennsylvania Health Savings Account Act will be effective 60 days after enactment and apply to taxable years beginning after Dec. 31, 2004. It specifies that distributions from health savings accounts that are not used for the qualified medical expenses of the beneficiary, as well as any excess contributions, will be taxable.

The Pennsylvania Chamber of Business and Industry said it is disappointed that the Legislature did not extend the same special tax treatment to health savings account contributions that they receive for federal tax purposes and vowed to make the issue a priority when state lawmakers return from their summer recess.

"While we note that the concerns of insurance companies have been addressed by ensuring compliance with the federal health savings account law, we are extremely disappointed that the small business community's needs were ignored," Jim Welty, vice president of legislative and corporate affairs for the chamber, said in a statement. Welty said the savings from making the interest on health savings accounts tax-free is negligible compared to tax savings that could have been realized had the contribution exemption remained in the bill.

[Lame Duck]

Minnesota

This appeared on PlanSponsor.com this morning.

Minnesota Governor Tim Pawlenty has signed H.F. 138, legislation that amends Minnesota law to bring it into conformance with federal law that gives federal tax breaks to health savings accounts (HSAs). As a result, contributions employees make to HSAs will be tax-deductible, while employer contributions will not be added to employees' Minnesota taxable income. Additionally, distributions made from the accounts to pay for medical-related expenses will not be taxed. The change in tax law is retroactive to January 1, 2004..

[Gary Lesser]

Legislators in Most States Have Cleared the Way for Health Savings Accounts

Reprinted from the Aug. 19, 2005, issue of INSIDE CONSUMER-DIRECTED CARE a biweekly newsletter with timely news and insightful analysis of benefit design, contracts, market strategies and financial results.

Insurance commissioners in Rhode Island, Pennsylvania and Florida tell ICDC that lawmakers in their states recently removed legal roadblocks that would have made it impossible, or at least difficult, to pair a health savings account (HSA) with a high-deductible health plan (HDHP). But the clock is ticking for legislators in several states that still have laws on the books that could prevent or impede the adoption of HSA-based health plans on Jan. 1, 2006, when a two-year "transition period" granted by the Treasury Dept. comes to a close.

On Jan. 1, 2004, when HSA-based health plans became available, laws in 17 states included "structural impediments" that made it difficult to pair an HDHP with an HSA, says Larry Akey, a spokesperson for America's Health Insurance Plans (AHIP), the trade association for health insurers. "Today there are only two, New York and New Jersey," he says, adding that legislators in both states are working to address the impediments.

While some states — including Illinois, Maine and Missouri — allow insurers to pair high-deductible PPOs with HSAs, they can't couple the accounts with a high-deductible HMO. "Our HMOs cannot be used with an HSA because the deductibles are too low. By our definition, a plan that has a high deductible is not an HMO," says Sue Hofer, a spokesperson for the Illinois Division of Insurance. "We expect that employers that want to offer HSA-qualified plans will do so by offering a [high-deductible] PPO."

Although HSA contributions are exempt from federal taxes, several states — Alabama, California, Maine, Massachusetts, New Jersey, Pennsylvania and Wisconsin — don't exempt HSA dollars from state taxes. Such laws, Akey says, could hinder adoption of the plans, or confuse account holders who aren't familiar with the state-specific glitches. But most health insurers, he adds, "seem to be going out of their way to educate their customers" about the effect laws in some states could have on their HSAs.

Milwaukee-based Assurant Health, a division of Assurant Inc., is one of the nation's largest sellers of HSA-compatible plans. Legal roadblocks haven't stopped the company from selling HDHPs in several states, including its home state of Wisconsin where Gov. Jim Doyle (D) twice vetoed legislation that would have exempted HSAs from state taxes.

"It doesn't preclude us from selling [HSA-based plans] because the big tax benefit is on the federal side, and there's also premium savings for the [high-deductible] plans," says Assurant spokesperson Rob Gilbert. "I don't think it will have a significant sales impact" in the states that don't remove legal obstacles before the end of the year.

State laws will have little, if any, impact on large employers that make HSA-based plans available this fall, says John Hickman, an employee benefits and compensation attorney in the Atlanta office of Alston & Bird, LLP. Most large employers, he says, adopt self-funded plans "that are not subject to state mandates."

Roundup of HSA Rules in Selected States

Here's a look at states that have recently removed legal HSA roadblocks, or are still working out the kinks:

Rhode Island: In 2004, state lawmakers in Rhode Island passed legislation that addressed some of the issues that made it impossible for health plans to comply with the Treasury Dept.'s definition of an HSA-qualified plan. While they removed first-dollar coverage mandates for several health-related issues, they missed a rule that requires insurers to cover early-intervention services below the deductible for special-needs children. "The way the bill was written allowed one mandate to slip through and not be included" in the HDHP legislation, says Rhode Island Health Insurance Commissioner Christopher Koller. A joint proposal passed this year, and signed by Gov. Don Carcieri ® on June 28, addresses the mandate. The new law also exempts tax-advantaged health plans in general from any future mandates. Rhode Island's two largest insurers have since applied to sell HDHPs in the state, Koller says. Blue Cross Blue Shield of Rhode Island's HSA-compatible plans will be available on Oct. 1, while UnitedHealthcare of New England says its product will be effective a month earlier.

Florida: A state law in Florida prohibits health insurers from charging deductibles for services provided to victims of violent crimes. House Bill 811 addressed the specific impediment for HSA-based plans. On June 14, Florida Gov. Jeb Bush ® signed legislation that allows health insurers to sell HSA-compatible health plans, says Rich Robleto, deputy commissioner of the Florida Office of Insurance Regulation. This month, UnitedHealthcare said HSA-based plans would be among the options available to government and state university employees across Florida this fall.

New Jersey: A state law requires insurers to provide below-the-deducible coverage for tests that screen children for levels of lead in their blood. The health coverage also must include any necessary medical follow-up and treatment for children determined to have lead poisoning. Two bills, SB 2435 and AB 3440, have been introduced to remove the mandated benefit, says Perry Krasnove, a spokesperson for the New Jersey Dept. of Banking and Insurance. AB 3440 moved through committee and passed in the Assembly by a 77-0 vote in June, Krasnove says. Both bills are now pending in Senate Commerce Committee.

New York: Health coverage in New York must include home health care coverage that has a deductible of no more than $50. The state also requires that health plans provide below-the-deductible preventive and primary care coverage for children. Lawmakers in New York have proposed legislation that would remove those impediments for HSA-based plans, says Chapin Fay, a spokesperson for the New York State Insurance Dept. Another bill, S-1405, would authorize HMOs to offer high deductibles. While that bill passed the state Senate, it died in the Assembly, Fay says, adding that the legislature could take up the issue again this fall.

Pennsylvania: Last month, Pennsylvania Gov. Edward Rendell (D) signed legislation (SB 107) removing two rules that required some below-the-deductible health coverage. One rule required insurers to provide coverage of at least one home health visit for new mothers who are discharged from the hospital less than 48 hours following a normal delivery or 96 hours after a Caesarean delivery. The other rule required coverage of medical foods for the treatment of several health conditions. Highmark, Inc., a company that operates two Blues plans in central and western Pennsylvania, had been marketing HSA-based plans prior to the adoption of the new rule. The change, however, could eliminate some of the confusion surrounding the plans, says spokesperson Michael Weinstein. "There was interest in the plans, but we'll wait for the marketplace to tell us if this will translate into additional sales," he says. "We'll learn a lot more after Labor Day, when we begin the renewal cycle."

[Guest chloe]

CALIFORNIA: The governor signed AB 115 on 10/7/2005 which amends the tax code. It does have references to HSA, but its not clear to me whether contributions are taxable or not under the revised code. My recent understanding had been that the HSA tax reforms had been removed from the final version sent to the governor since he was not willing to sign it. However, the final signed version does reference HSAs. Anyone have any idea what the HSA tax status is in CA and whether this bill eliminates the tax issue or not?

[Guest chloe]

CALIFORNIA: I have an update from our tax counsel. The bill does not alleviate the tax issue for HSAs. Those provisions were removed before the bill was sent to the governor. The language actually specifically says that HSA contributions are taxable.

Moderators' Note: California AB 2010, introduced 2/9/06, would allow deductions for HSA contributions in conformity with federal law.

[JDuns]

FYI - On Dec. 8, 2005, the MASS Governor signed House Bill 4169 to become a conforming state.

(http://www.mass.gov/legis/laws/seslaw05/sl050163.htm)

Moderator's Note: Mass. conformed to the IRC as amended and in effect on Jan. 1, 2005, with Mass St. 2005, c. 163, § 3, An Act Relative to Tax Laws, signed December 8, 2005. Before that, Mass. conformed to the IRC as amended and in effect on Jan. 1, 1998... Thus, HSAs now qualify for the exclusion from gross income. -- by GSL

[JDuns]

On Thursday, July 6, 2006, Pennsylvania became a conforming state (employee and employer HSA contributions are now not taxable). I don't have the bill number and the enrolled version has not yet been put on the legislative website but the press release is at

http://www.governor.state.pa.us/governor/c...15&q=448318

[Guest chloe]

We were very happy to see PA change its tax code since we have a large number of employees in PA. But does anyone know if this has any impact on the Philadelphia city wage tax? It won't help us much if the city still taxes HSA contributions.