March 11, 2008
Minnesota “Fixes” HSA Rules Under State Income Tax Law
The Problem. Until last week, Minnesota law differed from federal law with respect to the excludability from income of certain HSA contributions. Specifically, Minnesota had not adopted the new federal HSA rules that were effective in 2007 regarding contribution limits, qualified HSA distributions, and IRA rollovers to HSAs.
Because these new rules were not incorporated in Minnesota law, individuals with HSAs were required to apply the old federal HSA rules when determining net income for purposes of their Minnesota income tax returns. In some cases, this meant employees had to include as income certain HSA contributions and rollovers that were otherwise excluded from income under federal law.
The Solution. Minnesota corrected this problem with the passage of a law incorporating the current federal HSA rules. This law was signed by Governor Pawlenty on Friday, March 7, 2008. The law is effective for taxable years after December 31, 2006.
As a result, the new federal HSA rules that were effective beginning January 1, 2007, are now also applicable under Minnesota law beginning on the same date. Employees who took advantage of these new HSA rules in 2007 (e.g., by making contributions in excess of their deductible or by contributing a qualified HSA distribution from an HRA or health FSA) will now be able to exclude such contributions from their income for purposes of their Minnesota income tax return.
Special Note: If an employee has already filed his/her Minnesota income tax return and was required to include a portion of his/her HSA contributions in taxable income, he/she can now file an amended return for the purposes of excluding those contributions.
Action Items. In light of the new law, you may want to consider the following actions:
- If you sponsored an HSA program in 2007, notify your employees of this development to allow them to take advantage of the change in Minnesota law. We can assist with putting together a communication piece.
- If you currently sponsor an HSA program and have been hesitant to amend your HRA and/or health FSA to allow qualified HSA distributions because of the issues under Minnesota law, add this feature now that it is clear such distributions will not be included in income for purposes of Minnesota law.
Please contact us if you have any questions or concerns regarding this issue.
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The information contained in this ALERT is intended for general information purposes only and does not constitute legal advice relative to a specific situation.