HSA's and California Tax Law = Headache?
As if the new health savings accounts weren't complicated enough, employers and individuals who open one in California should arm themselves with a big bottle of aspirin. California has not conformed to the federal tax law that created the accounts. That means they provide fewer tax benefits and more record-keeping headaches for Californians than for residents of states that automatically conform to federal tax legislation.
Assemblyman Abel Maldonado, R-Santa Maria (Santa Barbara County), introduced a bill this year that would have given the accounts the same tax breaks at the state level that they get at the federal level, starting Jan. 1, 2006. The bill went nowhere.
Julie King, an aide to Maldonado, says the assemblyman plans to introduce the bill again next year. But there is no guarantee it will be passed.
Some legislators object to the cost. The Franchise Tax Board estimates that California would lose $25 million in tax revenue in fiscal 2006-07 if the bill passes.
Others object to HSAs. King says some Democrats opposed the bill because "they would have preferred universal health care." The accounts are the centerpiece of President Bush's plan to make consumers responsible for their health care spending.
And HSAs don't have the widespread appeal that forced a reluctant state Legislature to match some of President Bush's more popular federal tax incentives.
The bill did have the support of the California Chamber of Commerce because it believes HSAs will create more health care choices for individuals and employers.
One California doctor who wants to set up an HSA for his employees says he was disappointed to learn they won't get state tax benefits.
"One would think that a state that tried to force companies to provide health care coverage to employees (Proposition 72) would be willing to provide a tax break to those who voluntarily do so," says the doctor, who did not want his name used.
Pass the painkillers
Here's how the difference in tax treatments will affect Californians.
Almost any adult younger than 65 who is covered by a specific type of high-deductible health insurance policy and has no other health insurance, can open an HSA at any bank or financial institution that offers them.
Each year, they can contribute to the account an amount equal to their policy's deductible, but not more than $2,600 for an individual or $5,150 for a family. (Those limits will rise to $2,650 and $5,250, respectively, in 2005.)
Account holders get a federal income tax deduction for money they put in even if they don't itemize deductions. The money grows in the account free from federal taxes and remains free from federal tax when they take it out if it is used for qualified medical expenses (excluding policy premiums).
If they take money out and use it for something other than health care, it is subject to federal income tax, plus, if they are younger than 65, a 10 percent penalty.
In California, there is no state-tax deduction for contributions to an HSA, and the account's earnings are subject to state income tax.
Depending on what kind of annual statement the financial institution sends out, it could be extremely difficult to figure out how much HSA income account holders should report on their California tax return each year.
"My concern is that people aren't going to track it and report the income. At some point, the Franchise Tax Board is going to say, 'Aha, here is all this unreported income,' " says Lynn Freer, president of Spidell Publishing.
Because the HSA money has already been taxed in California, it won't be subject to state income tax when it comes out, no matter how it is spent. But this will require another record-keeping chore.
"In your permanent files, you need to keep track of what deductions you took on the federal and state returns and the amount of income you reported on the state return, because when you pull money out, you won't have to pay state tax on it again," says Freer.
Here's an example, from Spidell's California Taxletter.
"Juana Porsche opens an HSA, making a contribution of $2,000 in each of four consecutive years. During the four years, the account earns $250 per year, for a total of $1,000. At the end of the fourth year, she withdraws the entire $9,000 to make a down payment on a car.
"For each of the four years, she gets a $2,000 above-the-line deduction on her federal return. She gets no deduction for California. For each of the four years, she excludes the $250 income for federal purposes. For California, she must report the $250 as income. When she withdraws the entire account of $9,000 in a nonqualifying distribution, she pays tax and a penalty on her federal return. For California purposes, she reports no income because she has basis of $9,000."
Employee HSAs
Employers may offer HSAs and HSA-compatible insurance policies to their eligible employees.
Employees can put money into the account, and it won't be counted as wages for federal tax purposes, but it will be subject to California income tax.
Employers can make contributions to an HSA on behalf of employees, as they often do in 401(k) plans. Employer and employer contributions are not subject to Social Security and Medicare tax, which are federal taxes.
However, employee contributions to HSAs will be subject to state disability and state income tax withholding, says Freer.
EXCERPT. To read entire article click here
Sorce: San Francisco Chronicle
Blue Cross Offers Health Coverage for California’s Seasonal Workers
Many workers travel throughout our state as regular seasonal employees of various farming operations. Blue Cross of California is the first to give small group employers in agricultural industries an opportunity to offer coverage to their seasonal workers.
More...
WHAT'S A DEDUCTABLE DUDE?
Blue Cross Breaks the Mold by Offering Uninsured "Young Invincibles" (young adults ages 19 to 29) New Options; Simple, Online, All-Inclusive Health Coverage from their tonik website. Blue Cross of California has broken the mold of traditional health insurance offerings by marketing unique health plans tailored to the lifestyle and attitudes of "young invincibles."
More...
Health Net Expands Options with Two New PPO Plans
Effective January 1, 2005, Health Net will expand its options by adding two new PPO plans.
Health Net's new "First Dollar" and HSA-compatible PPO plans are designed to add flexibility in meeting individual health coverage needs.
More...
Key health issue: paying
Middle class fears heavy burden By Troy Anderson Daily News Staff Writer (excerpt) Business and health care leaders said Wednesday that some health-related propositions on last week's ballot failed because they would have overburdened middle-income taxpayers.
More...
California insurance commissioner OKs Anthem-WellPoint merger
By Alex Veiga ASSOCIATED PRESS LOS ANGELES – The state's insurance commissioner gave his blessing Tuesday to a $16.4 billion merger that would create the nation's largest health insurance company after saying he had wrung hundreds of millions of dollars out of the companies involved that would be used to improve health care for all Californians.
More...
Graduates Should Pay Attention to Health Insurance Deadlines
Madison, WI--Recent graduates of high school or college who've been covered under parents' group health insurance plans should plan immediately for health insurance coverage. Checking the policy is the first step, according to the Office of the Commissioner of Insurance (OCI).
More...
How Will The New Health Savings Plans Work?
(EXCERPT)Here are some quick questions and answers about the alphabet soup of medical accounts:Health savings accounts, which Congress authorized in 2003, are the newest addition to the alphabet soup of health insurance available to American workers. Now workers and employers must sort through HSAs, health reimbursement accounts (HRAS), and flexible spending accounts (FSAS). Each has its own rules about how money is spent, how it can be saved, and how it is taxed. Here's a road map through the complex new world of health insurance:
More...
