Health accounts complicate tax prognosis (Milwaukee Journal Sentinel)March 6, 2005
When David Bauer sits down to do his state income taxes this month, he will have a new wrinkle to deal with: health savings accounts.
A certified public accountant by training and an investment manager by profession, Bauer has had an account since April, four months after they became legal. “We were very early adopters of it,” he said of the eight-person staff at Facilitator Capital Funds in Milwaukee, where he is the chief financial officer.
Under the federal Internal Revenue Code, money put into HSAs is deductible, and no taxes are due on earnings or withdrawals if they are used to pay medical expenses. To qualify for an HSA, a person must be covered only by a high-deductible insurance policy approved by the government.
Wisconsin, however, is among eight states that have not followed the federal tax law on HSAs. There is no state income tax deduction for HSA deposits, and earnings are taxable as they occur. While politicians in Madison argue over whether to change that, taxpayers must make adjustments when filling out state forms.
The difference “is a little distraction,” said Bauer, who still prepares his own taxes “because I enjoy doing them.”
The state enjoys the results, too, taking in $3 million to $4 million a year because it has not adopted the federal rules on HSAs, according to an estimate from Assembly Speaker John Gard (R-Peshtigo).
Gard has led efforts to change that. Last year, the Republican Legislature passed a law to make HSA contributions and earnings deductible on Wisconsin income taxes, but Gov. Jim Doyle, a Democrat, vetoed it. This year, the measure was passed again in the Assembly, and it is awaiting action in the Senate.
HSAs “are the law of the land, and Doyle wants to make them unattractive through taxation,” Gard said. “I don’t know why you would tax somebody for setting aside health care money.”
Doyle spokeswoman Melanie Fonder said, “The healthier and wealthier people are the ones that would use these, from the research we have seen.” Because of that, Doyle is concerned that insurance premiums would rise for those who are not offered HSAs or are unable to qualify for them.
If the Legislature sends him the bill again, “he is not likely to sign it,” Fonder said.
Gard is undaunted.
“If he vetoes it, we will pass it again,” Gard said. “The governor expects us to walk away, and that is not going to happen.”
This standoff puzzles Dan Perrin, president of the HSA Coalition, a Washington group dedicated to promoting the accounts.
“It is a head-scratcher, in terms of the state’s economy,” he said.
Wisconsin business is developing a specialty in creating and servicing HSAs. With Indiana, Wisconsin is a leading state when it comes to insurance companies offering HSAs and banks serving as trustees for the accounts, Perrin said.
Liz Kaiser, a CPA and partner with Winter Kloman Moter & Repp in Elm Grove, said the difference in state and federal tax policies makes it more difficult to explain the benefits of HSAs to clients.
The principal attraction for employers is that HSAs have the potential to lower their health insurance premiums because the policies that allow people to open the accounts must have a deductible of at least $1,000 for an individual and $2,000 for a family.
Those limits must be reached before the policy can pay out, but the money to satisfy the deductibles may come from an HSA.
As a result, employers often find they can make contributions to HSAs on their employees’ behalf and still save money.
That creates other tax challenges. To the Internal Revenue Service, the contribution is not income to the worker. But to the Wisconsin Department of Revenue, it is. Therefore, on the W2 forms that such workers receive, the figure in the box for state income differs from that in the box for federal income taxes.
Additionally, Wisconsinites must report to Madison the income and dividends from the accounts. Each HSA owner receives a form 1099SA annually, listing those earnings. Copies of the 1099SAs also are sent to the IRS, which traditionally shares such information with state tax authorities.
No one is sure how many HSAs have been opened in Wisconsin, but they are prevalent enough that an entire section of the Department of Revenue’s Web site is dedicated to the situation. It can be found at www.dor.state.wi.us/taxpro/news.html#health.
In addition to possible contributions from their bosses, for employees, the benefit of an HSA is that dollars that are not spent remain in the account. That lets them collect interest free from federal taxes for an unlimited period. Proponents such as Perrin said that because of this, HSAs encourage people to be careful in how they spend money on medical care, putting pressure on prices.
Bauer has found that proposition iffy.
“If you were to go and purchase something somewhere, you want to know what it costs,” he said. “That is not available for health care. It is a bit of a frustration.”
Still, he is not complaining. Overall, he estimated that HSAs have resulted in about a 30% reduction in health care costs for Facilitator Capital, even with Wisconsin’s tax code.
Lank, Avrum D. “Health Accounts Complicate Tax Prognosis.” Milwaukee Journal Sentinel 6 March, 2005