Clients working with a bankruptcy lawyer often ask us if “Health Savings Accounts,” also called HSA’s, are exempt in bankruptcy. This is relevant to many clients of Nova Law Group who may have contributed substantial funds to HSA’s, and accordingly, have a desire to keep those funds exempt so that they can retain them in bankruptcy.
HSA’s are tax-advantaged accounts that are created to allow individuals with high-deductible insurance plans to save for their healthcare expenses. Individuals can contribute to the HSA and then withdraw money as needed to pay for qualified healthcare expenses.
While the purpose of HSA’s is to save for healthcare expenses not covered by insurance, technically the money can be withdrawn by an individual for any purpose with a 10% penalty applied (in addition to income taxes) if the individual is under the age of 65. At the age of 65, money in an HSA can be withdrawn for any reason, by paying the income taxes due on such withdrawn amounts. HSA funds are generally considered property of the bankruptcy estate, unless an appropriate exemption applies.
Accordingly, the question remains, are HSA accounts exempt in bankruptcy? At the time of this writing, when applied to individual debtors claiming California or Federal exemptions, the answer is “no.” Federal exemptions do not include any specific exemption for HSA funds. 11 U.S.C. §522(d) (2024). Additionally, there is no separate California exemption for HSA funds at the time of this writing, although legislation has been enacted in other states to separately exempt HSA funds, which may also occur in California in the future. Cal. Civ. Code §§703, 704 (2024).
While HSA funds are not subject to a specific exemption under the Federal or California exemptions, individuals who wish to exempt HSA funds in bankruptcy can still exempt such funds by using the “wildcard exemption” provided in both Federal and California exemptions. 11 U.S.C. §522(d)(5) (2024); Cal. Civ. Code §703.140(b)(5) (2024).
If you have questions regarding filing bankruptcy, including the treatment of your HSA account in bankruptcy, contact Nova Law Group and speak with a bankruptcy attorney who will be happy to assist you with your needs. Nova Law Group represents bankruptcy clients throughout the San Francisco Bay Area from our office in Mountain View, California.
