Governor Arnold Schwarzenegger has approved a measure, AB 115, that makes employee HSA payments tax-deductible while employer contributions will not be added to employees’ California taxable income, Business Insurance reported.
Additionally, distributions made from the accounts to pay for medical expenses will not be taxed.
That brings things in the Golden State in line with the 2003 federal law setting up the HSAs that are offered with high-deductible health insurance plans.
The California measure is similar to one approved in Pennsylvania in July, changing the Keystone State’s tax rules regarding the HSAs (See PA Clears Way for High Deductible Health Plans Linked to HSAs ).
UPDATE: The HSA langague was deleted from the bill at the last moment (See CA Tax Conformity Bill Excludes HSAs ).