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 and ending before January 1, 2011, Wisconsin does not follow the provisions of Public Law 108-173 relating to health savings accounts.
Effect of Wisconsin Not Following the Federal Law Change
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 Form W-2, or
- providing employees with a supplemental "Wisconsin only" Form W-2 with the taxable health savings account benefits shown in Box 16.
Information for Individuals - Where to Adjust for Differences Between Wisconsin and Federal Law
Individuals should use Wisconsin Schedule I (titled "Adjustments to Convert 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. (Note: Even in those cases where the employer failed to notify the employee on the Form W-2 as required above, the employee must still adjust for the difference on Schedule I.)
When completing Part II of Schedule I, it will be necessary to complete a revised federal Schedule A to determine the allowable medical expenses for use in determining the Wisconsin itemized deduction credit. Medical expenses paid from the health savings account are included in line 1 of the revised federal Schedule A as a medical expense. All medical expenses are then reduced by 7.5% of federal adjusted gross income.
February 16, 2011