2011 Treatment of Health Savings Accounts

2011 Wisconsin Act 1 adopted the federal treatment of health savings accounts (HSAs) for Wisconsin. The Wisconsin treatment of HSAs will be the same as the federal treatment, effective for taxable years beginning on or after January 1, 2011.

For example,

  • A deduction is allowed for the amount contributed to an HSA by an individual.
  • The amounts contributed by an employer to an HSA (including contributions made through a cafeteria plan) are not taxable wages to the employee.
  • The interest or other earnings on the assets in the HSA are tax free.
  • Amounts distributed from the HSA are not taxable if used to pay qualified medical expenses.
  • Rollovers from an Archer medical savings account or qualified distributions from a health flexible spending account or a health reimbursement arrangement to an HSA are not included in income.
  • Amounts distributed from an HSA that are not used to pay qualified medical expenses must be included in income and are subject to a penalty.

For federal tax purposes for taxable years beginning on or after January 1, 2011, there is an additional 20% tax on distributions not used for qualified medical expenses (except in the case of disability, reaching age 65, or death). If an individual is subject to this federal penalty, there is a Wisconsin penalty equal to 33 percent of the federal penalty.

Information on the 2010 treatment of HSAs and on how individuals should report the differences between the federal and Wisconsin law is available on the department's website at www.revenue.wi.gov/Pages/TaxPro/2008/news-2008-080212.aspx.

February 23, 2011