Wisconsin Says HSA Tax-Breaks Don't Apply to State Taxes

December 27, 2004 (PLANSPONSOR.com) - The state of Wisconsin has given notification that many of the tax breaks offered by the federal government regarding health savings accounts (HSAs) will not be found in state income tax provisions.

>On its Web site , the Wisconsin Department of Revenue has announced that multiple provisions set forth in President Bush’s Medicare Prescription Drug, Improvement, and Modernization Act of 2003 that relate to health savings accounts (HSAs) do not apply for Wisconsin for the taxable years beginning in 2004.

>The department points out that some federal provisions relating to the accounts do no apply to Wisconsin state taxes. Provisions that are under question include:

  • Deductions are not allowed for the amount contributed to health savings accounts for an individual.
  • Earnings on health savings accounts are taxable.
  • Amounts distributed from health savings accounts are taxable in Wisconsin regardless of whether or not the amount is used to pay medical expenses.
  • Medical expenses paid with a distribution from health savings accounts are allowed in the computation of the Wisconsin itemized deduction credit.
  • Rollovers from Archer medical savings accounts to health savings accounts will results in a taxable transaction.
  • Amounts contributed by an employer to a health savings account for an employee are taxable wages to the employee.
  • Amounts contributed to a health savings account pretax by an employee under Internal Revenue Code Section 125 (cafeteria plan) are taxable wages for Wisconsin.

>The state also gave notification that contributions that represent additional wages can be reported to employees either by including the amount in Box 16 of the 2004 Form W-2, or by providing the employees with a supplemental meant for Wisconsinites only.

>Individuals should see the  Wisconsin Schedule I   – “Adjusted to Covert 2004 Deductions to the Amounts Allowable for Wisconsin” – to adjust for differences between state and federal income tax treatments of the new health accounts.