November 9, 2004
Contributions to HSA Not Excludable From Income Tax Under State Law
Last week, the Minnesota Department of Revenue (“DOR”) formally indicated its position on the treatment of certain contributions to HSAs for Minnesota income tax purposes. The position was communicated through a revision to Schedule M1NC, the schedule required to be filed to make adjustments to an individual’s federal tax return. Specifically, M1NC now requires that pre-tax contributions made to an HSA by the taxpayer’s employer or by the taxpayer through a cafeteria plan be added back into taxable income for state income tax purposes. The change has no impact on the tax treatment of such contributions under federal law and they remain excluded from income for purposes of federal income tax.
Earlier drafts of Schedule M1NC did not require the addition of such pre-tax contributions to an HSA. Rather, the drafts focused on after-tax contributions for which the taxpayer takes a federal income tax deduction and required such contributions to be added back into taxable income. Furthermore, in response to informal inquires regarding the treatment of pre-tax contributions under state income tax law, the DOR previously indicated such contributions would be excluded from income, referring to the prior drafts of Schedule M1NC as support for their conclusion.
In response to recent inquires regarding this issue, the DOR representatives have expressed their hope the Minnesota legislature will, in its next session, amend Minnesota law to recognize HSAs and give them the same tax-favored status as under federal law. DOR has also informally indicated that such legislation could be effective retroactively to effective date of the federal legislation (January 1, 2004).