Health Savings Accounts, Flexible Spending Accounts and Bankruptcy

In the last few years, especially since Affordable Care Act became law, Health Savings Account (“HSA”) or Flexible Spending Account (“FSA”) became a lot more popular as consumers are dealing with ever rising costs of health care.  However, a debtor’s funds held in an HSA or FSA do not appear to be exempt under either New York state exemption law or Section 522 of the Bankruptcy Code. This means that a bankruptcy trustee may pursue debtor’s Health Savings Account or Flexible Spending Account, unless those funds are otherwise exempt.

A Health Savings Account is a tax-exempt account funded by a debtor, his employer or both, to be used to pay the debtor’s medical expenses that are not covered by health insurance such as co-pays or deductibles. The debtor owns the account, and, if debtor changes jobs, can be moved elsewhere. In addition, the funds can accumulate over time and do not have to be used at any particular time. When funds from a Health Savings Account are used to pay medical expenses, it is not treated as income to the debtor.

New York does not provide a specific exemption statute for a Health Savings Account. The most common argument for exemption is that a Health Savings Account is similar to a retirement fund and therefore is exempt for the same reasons that retirement funds are. However, in New York a “retirement fund” is exempt only if “qualified” for tax-exempt status under Internal Revenue Code (“IRC”) sections 401, 402, 403, 408, 408A, 414, 457 or 501(a). Since the tax status of a Health Savings Account is governed by IRC § 223(d), this argument fails. Another argument is that a Health Savings Account is similar to a health aid, and should be exempt for that reason. However, the list of health aids exempt in New York is a very narrow one covering essentially prosthetics and guide dogs, and HSA’s do not appear on the statutory list. If a New York debtor does not claim a homestead exemption, the state “wild card” exemption of $1,000.00 can be applied to protect an HSA, but any funds above that $1,000.00 figure would be available for the Chapter 7 Trustee.

Similarly, there is no specific exemption to claim Health Savings Accounts under federal bankruptcy law. Since a Health Savings Account is not created “on account of illness, disability, death, age or length of service”, and its tax-exempt status is not derived from IRC sections 401, 402, 403, 408, 408A, 414, 457 or 501(a), it is not exempt as a retirement fund. Further, only “professionally prescribed health aids” are exempt under the federal scheme. A fund established by the debtor to pay non-insured medical expenses would not be deemed “prescribed” by a medical professional, so an HSA is not exempt under this section either. If the debtor has it available, federal “wild card” exemption can be used to exempt up $12,725.00 in any asset, including an HSA. Any funds above the “wild card” exemption figure would also be available for the Chapter 7 Trustee.

A Flexible Spending Account (“FSA”) is a tax-deferred savings account established by an employer to pay a debtor’s medical expenses not paid by insurance. Money withdrawn from an FSA to pay for a debtor’s qualified medical-related expenses is also tax-free. Unlike an HSA, funds in an FSA are forfeited to the employer if not used in the benefit year. It appears that a Flexible Spending Account would be treated in bankruptcy court similarly to Flexible Spending Accounts.

If you contemplating filing Chapter 7 Bankruptcy or Chapter 13 Bankruptcy, or are dealing with debt problems in Western New York, including Rochester, Canandaigua, Brighton, Pittsford, Penfield, Perinton, Fairport, Webster, Victor, Farmington, Greece, Gates, Hilton, Parma, Brockport, Spencerport, LeRoy, Chili, Churchville, Monroe County, Ontario County, Wayne County, Orleans County, Livingston County, and being harassed by bill collectors, and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation with a Rochester, NY, bankruptcy lawyer.

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