Additional Tax on HSA and Archer MSA Distributions

Additional Tax on HSA and Archer MSA Distributions

(Note: Periodically, Health Reform Talk focuses on detailed explanations of specific provisions in the new health reform law. Click here for previous post on health reform provisions.)

So what’s included in Sec. 9004 of the Affordable Care Act, concerning the additional tax on HSA and Archer MSA distributions?

The additional tax on distributions from health savings accounts (HSAs) and Archer medical savings accounts (MSAs) not used for qualified medical expenses is increased to 20% of the amount of the distribution included in gross income.

Health savings accounts (HSAs) and Archer medical savings accounts (MSAs) provide tax-favored treatment for amounts that are contributed and used to pay the qualified medical expenses of the account beneficiary, his or her spouse, or dependent (IRC Secs. 220 and 223). Distributions are excludable from gross income if they are made for qualified medical expenses of the account beneficiary, his or her spouse or dependents. Distributions from an HSA or an MSA that are not used for qualified medical expenses are included in beneficiary's gross income and subject to an additional penalty, unless made after the beneficiary's death, or disability.

Note that effective for distributions from an HSA or Archer MSA after Dec. 31, 2010, qualified medical expenses includes the cost of any medicine or drug only if it is prescribed by a physician or is insulin.

The additional tax on distributions made from HSAs not used for qualified medical expenses is increased from 10%to 20%of the amount includible in gross income. The additional tax on distributions made from Archer MSAs not used for qualified medical expenses is increased from 15 percent to 20 percent of the amount includible in gross income.

The increase in the tax imposed on nonqualified distributions from HSAs and Archer MSAs will not impact state taxation.

Effective date. The provision applies to distributions made after Dec. 31, 2010.

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