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CCH® PAYROLL — 3/3/08

Wisconsin discusses nonconformity to HSA provisions

For tax years beginning after 2003, the Wisconsin personal income tax does not conform to the provisions of the federal Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (P.L. 108-173) relating to health savings accounts (HSAs). Accordingly, federal provisions concerning HSAs do not apply for Wisconsin purposes, as indicated in the following examples:

• a deduction is not allowed for the amount contributed to an HAS for an individual;
• earnings on the HSA are taxable to the individual;
• amounts distributed from the HSA are not taxable to Wisconsin, regardless of whether the amounts are used to pay medical expenses;
• medical expenses paid with a distribution from an HSA are allowed in the computation of the Wisconsin itemized deduction credit;
• a rollover from an Archer medical savings account to an HSA results in a taxable transaction;
• amounts contributed by an employer to an HSA for an employee are taxable wages to the employee; and
• amounts contributed to an HSA on a pre-tax basis by an employee under IRC Sec. 125 (cafeteria plan) are taxable wages for Wisconsin purposes.

Contributions to an HSA that represent additional wages to an employee for Wisconsin purposes can be reported to employees by either including the amount that is taxable for Wisconsin purposes (but not taxable for federal purposes) in Box 16 of the Form W-2 or providing employees with a supplemental “Wisconsin only” Form W-2 with the taxable HSA benefits shown in Box 16.

To adjust for differences between the Wisconsin and federal income tax treatment of HSAs, individuals should use Wisconsin Schedule I, Adjustments to Convert Federal Adjusted Gross Income and Itemized Deductions to the Amounts Allowable for Wisconsin. (News for Tax Practitioners, Wisconsin Department of Revenue, February 12, 2008.)

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