HSAs Gain Favorable WI Tax Treatment

HSA WI Tax UpdateMarch 2011

Pamela Branshaw, CPA, CEBS

In a long-awaited move, Wisconsin Governor Scott Walker signed into law the 2011 Wisconsin Act 1 on January 24, 2011. This Act changes Wisconsin income tax law to conform with federal tax law as it relates to health savings accounts (“HSAs”). Effective January 1, 2011, HSA account owners are no longer subject to Wisconsin income taxes on contributions, provided they do not exceed statutory limitations. In addition, earnings on HSAs are income tax-free as long as they are used for qualified medical expenses. This tax break is expected to save Wisconsin taxpayers over $49 million during the next two years and will not only reduce complexity related to payroll reporting and income tax preparation, but will help make health care a little more affordable. Prior to the enactment of this law, Wisconsin was one of only four states that did not allow favorable tax treatment of HSAs.

Immediate Action Required
For employers that sponsor cafeteria plans which allow employees to make pre-tax contributions to an HSA, the payroll deductions setup should be changed immediately to reflect these deductions as pre-tax deductions instead of post-tax deductions. Thus, HSA contributions will no longer be subject to Wisconsin income tax withholding. In addition, all employer contributions to HSAs will be tax-free and no longer should be added to Wisconsin taxable wages on Form W-2. Note that the new law does not apply to nonpayroll HSA contributions made from January 1, 2011, to April 18, 2011, which are designated for the 2010 year.

Other Considerations
This law change also means that HSA account owners will have income tax basis in their accounts to track in the event a distribution is taken for other than medical expenses in the future. If this should occur, the taxpayer will have a recovery of basis and applicable earnings for Wisconsin income tax purposes, instead of reporting the entire HSA distribution as taxable for federal purposes. The account balance as of December 31, 2010 (which consists of nondeductible contributions and taxable earnings from the inception date of HSAs on January 1, 2004, through December 31, 2010) should represent the total Wisconsin income tax basis for most taxpayers. If the HSA is used for qualified medical expenses, the Wisconsin income tax basis will be irrelevant.

HSA Summary – A comprehensive summary on health savings accounts.

Contributed By:

WIPFLi CPAs and Consultants

Pamela Branshaw, CPA, CEBS
pbranshaw@wipfli.com
715.858.6607

Tom Krieg, CPA
tkrieg@wipfli.com
715.843.7443

Bob Buss, CPA, CEBS
bbuss@wipfli.com
920.662.2851

Legal Disclaimer: This article is intended for informational purposes only and by no means should replace or substitute other legal documents (governmental or non-governmental) reflecting similar content or advice. If you have any questions concerning your situation or the information provided, please consult with an attorney, CPA or HR Professional.

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