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FEDERAL TAX TREATMENT OF HSAs - page 1 / 1

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The federal Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Public Law 108-173) provided for the establishment of health savings accounts.

A health savings account (HSA) is a special account owned by an individual and used to pay for medical expenses. Health savings accounts are used in conjunction with a high deductible health plan.

Wisconsin does not follow the provisions of Public Law 108-173 relating to health savings accounts.

FEDERAL TAX TREATMENT OF HSAs

  • Eligible individuals may claim a deduction on their federal income tax returns for contributions to the HSA. If the contribution is made by an employer (or pre-tax through an employer’s cafeteria plan), the amount of the contribution is excluded from the employee’s wages. The maximum contribution for 2010 is $3,050 for individuals and $6,150 for families. A $1,000 “catch-up” contribution is allowed for individuals age 55 and older.

  • Excess contributions must be withdrawn or are subject to a six percent excise tax.

  • Earnings on the account are not taxable to the

individual.

  • Distributions from the HSA are tax-free if used for qualified medical expenses. The medical expenses paid from the HSA distribution can not be used as an itemized deduction on Schedule A.

Distributions not used for qualified

medical

expenses must be included in income and are subject to a 10 percent additional tax. The 10 percent additional tax does not apply to distributions taken after the individual dies, becomes disabled, or is age 65 or older.

  • Distributions from an Archer medical savings

account may be rolled over to an HSA.

Further information on the federal treatment of HSAs can be found in federal Publication 969,

This publication is available at www.irs.gov or by calling 1- 800-829-3676.

WISCONSIN TREATMENT OF HSAs

  • A deduction is not allowed for contributions to an HSA, whether the contributions were made by the individual or the employer or pre-tax through the employer’s cafeteria plan. The amount deducted by an individual or excluded from an employee’s income for federal purposes must be included in Wisconsin income.

  • Earnings on the HSA account are taxable to the individual.

  • Amounts distributed from the HSA are not taxable, regardless of whether or not the amount is used to pay medical expenses. No penalty applies.

  • Medical expenses paid with a distribution from the HSA are allowed to be used in the computation of the Wisconsin itemized deduction credit.

  • A rollover from an Archer medical savings account to a HSA is a taxable transaction. The rollover amount must be included in income. The individual is subject to a penalty equal to 5 percent of the taxable amount.

  • Individuals must file Wisconsin Schedule I to adjust for the differences between the Wisconsin and federal tax treatment of HSAs.

For further information on the Wisconsin treatment of HSAs, contact any Department of Revenue office or our Customer Service Bureau at (608)266-2772.

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