Tax Update Blog: Permalink

« Previous · Tax Update Blog Home · Next »

HEALTH SAVINGS ACCOUNTS: RIPE FOR ABUSE?

May 27, 2004

One aspect of the new Health Savings Accounts has puzzled those of us who have had to turn in our medical receipts for cafeteria plan reimbursements: nobody is monitoring HSA withdrawals to ensure they are used for medical costs.

In a nutshell, amounts contributed to Health Savings Accounts are deductible, but withdrawals used for medical expenses are tax-free. The HSA rules provide no mechanism to ensure that HSA withdrawals are used for medical expenses. Only an IRS examination will identify withdrawals not used for medical expenses.

Kevin Knopf, Treasury benefits tax counsel, seems to think the HSA rules may rely excessively on the good faith of taxpayers. According to Tax Analysts, Mr. Knopt told a luncheon that he questions whether the IRS has the resources to prevent abuse of HSAs:

   Knopf would not say whether HSAs would
   become a major target for audits. “It’s up to 
   your discretion as professionals whether you
   think the IRS has the resources to go after
   thousands and thousands of individuals to
   ensure that they are using this money 
   solely for medical expenses,” he told the 
   audience.

More on HSAs here.

UPDATE: BenefitsBlog has more.

UPDATE II: Greg Jenner, Treasury tax policy chief, responds.

      Bookmark: del.icio.us • Digg • reddit