Current CA HSA Law

Current California Law

California law is conformed to the federal rules for MSAs and allows a deduction equal to the amount deducted on the federal return.  California imposes a 10% additional tax rather than the 15% additional federal tax on distributions from an MSA not used for qualified medical expenses. However, California has not conformed to any of the federal HSA provisions.  The California return starts with federal adjusted gross income (AGI) and requires adjustments to be made for differences between federal and California law.  Adjustments relating to HSAs are required under current law, as follows:

*    A taxpayer taking an HSA deduction on the federal return is required to increase AGI on the taxpayer's California return by the amount of the federal deduction.

*    Any interest earned on the account is added to AGI on the taxpayer's California return.

*    Any contribution to an HSA (including salary reduction contributions made through a cafeteria plan) made on the employee's behalf by their employer is not excluded from income and is added to AGI on the employee's California return.

Since a tax-free rollover from an MSA to an HSA is not allowed under California law, any distribution from an MSA that is rolled into an HSA must be added to AGI on the taxpayer's California return. Additionally, under California law that MSA distribution is not treated as being made for qualified medical expenses and is, therefore, subject to the MSA 10% penalty tax.

Disclaimer: Gilmore Bank and its affiliates are not engaged in rendering tax, investment or legal advice.  The information on this page may have inaccuracies, and federal and state tax regulations are subject to change.  If tax, investment or legal advice is required, seek the services of a licensed professional.