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Health Savings Accounts

Are they exempt from an individual’s bankruptcy estate?

Individuals covered solely by high deductible health plans have, since 2004, been eligible to make1 (or have their employers make on their behalf) tax-favored contributions to health savings accounts (HSAs). It appears that some individuals who’ve filed for bankruptcy have held a few significant size HSAs. The question has arisen as to whether those HSAs are exempted from the individuals’ bankruptcy estates.

Certain states that have opted out of the federal exemption scheme2 have clearly resolved the question by adopting HSA specific exemption statutes.3 Individuals residing in states without such HSA specific exemptions have, so far, been unsuccessful in their attempts to squeeze HSAs within an existing exemption. A recent unsuccessful HSA exemption effort in Ohio (an opt-out state)4 claimed that HSAs should be exempt under the same provisions as individual retirement accounts.5 The individual argued that HSAs and IRAs “are so similar that they should be given the same treatment under Ohio law and the Bankruptcy Code.” The Bankruptcy Court, however, held that the plain wording of those statutes, referring to “retirement” and retirement plan sections of the Internal Revenue Code couldn’t be so liberally construed.

An earlier HSA bankruptcy estate exemption attempt6 in an opt-out state relied unsuccessfully on Idaho exemptions for: (1) health aids necessary to enable the individual or dependent to work or sustain health, (2) benefits payable for medical, surgical or hospital care, and (3) “benefits paid or payable by reason of disability or illness.” The Bankruptcy Court, however, found that none of those exemptions fit HSAs. Further, in a footnote, the the court stated that in dicta that: “the federal bankruptcy exemptions do not currently allow funds in a HSA to be exempted from a bankruptcy estate.” If the court is correct in that reading of the federal exemption statute, HSAs aren’t exempt in states that follow the federal exemption scheme. However, that question would surely be argued more fully in a case to which it actually applied.

While opt-out state exemption statutes vary widely and the federal exemption scheme may not yet have been fully-analyzed, indications to date are that only exemptions specifically designed for HSAs are effective. That may be important planning information for individuals residing in states without HSA specific exemptions, who might be contemplating accumulating significant HSA balances for post-retirement healthcare or other long-term savings purpose.

1. One year’s contribution may be a direct transfer from the individual’s individual retirement account. Internal Revenue Code Section 408(d)(9).
2. The interaction between federal and state exemptions was explained in, Thomas C. Foster, “Keeping Benefits Safe From Creditors,” Trusts & Estates (September 2005) at p. 64.
3. For example, Section 38.3-5604 of the Code of Virginia added in 2010 and Section 42.0021 of the Texas Property Code as amended in 2005.
4. In Re: Lombardy, 109 AFTR 2d 2012-XXXX (Feb. 9, 2012).
5. Explained in, Thomas C. Foster, “Keeping Benefits Safe From Creditors,” supra note 2 and Thomas C. Foster and Bruce D. Steiner, “Creditor Claims on Retirement Benefits,” Trusts & Estates (September 2010) at p. 54.
6. In Re: Stanger, 385 B.R. 758 (April 8, 2008).

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