Wisconsin Law Update Health Savings Accounts

With the passage of 2011 Wisconsin Act 1, Wisconsin's law regarding Health Savings Accounts (commonly referred to as HSAs) is now consistent with federal law. This change is effective for taxable years beginning on or after January 1, 2011 and will not apply for your 2010 return. Over the next two years this new tax break is expected to cost the state approximately forty-eight million dollars in tax revenues.

An HSA is an individually owned account for use by people who participate in a High Deductible Health Plan (HDHP). Contributions to the HSA by an employer will no longer be taxable wages to an employee while the employee's own contributions could create a deduction for the individual. In addition, the earnings within the HSA are typically tax free. Under prior law these favorable tax attributes were available for federal tax purposes but not for Wisconsin. Now, for 2011 and beyond, Wisconsin's tax law will treat these accounts in a manner consistent with federal law.

Under the new law distributions for both federal and Wisconsin purposes will also be tax free if the distributions are for qualified medical expenses. Any distribution that does not qualify could be subject to federal and state penalties of up to twenty percent, in addition to being subject to ordinary income taxes.

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