Health Savings Accounts Not Exempt in Bankruptcy

04 Sep Health Savings Accounts Not Exempt in Bankruptcy

pills and moneyA health savings account (HSA) belonging to a Mounds View, Minnesota, police officer was not exempt in bankruptcy, the 8th Circuit Bankruptcy Apellate Panel ruled. The appeals court upheld the bankruptcy court’s order thatin Minnesota, anHSA is property of the bankruptcy estate pursuant to 11 U.S.C. section 541(a), and that HSA’s cannot be claimed exempt as illness or disability benefits pursuant to sections 522(d)(10) or 522(d)(11).

In this case, Lietch v. Christians, No. 13-6009 (8th Cir. BAP July 16, 2013), the debtor had a high deductible health insurance policy for him and his family provided by his employer. His HSA provided coverage for medical expenses up to the deductible amount of the debtor’s health insurance policy. When the debtor filed for chapter 7 bankruptcy, he listed as an asset the balance of funds in his HSA.

On the debtor’s list of property claimed exempt, he noted that his HSA was excluded from property of the bankruptcy estate by section 541(c)(2). He alsoclaimed that his HSA was exempt as an illness benefit under section 522(d)(10)(C), and that his HSA was also exempt as payment on account of bodily injury under section 522(d)(11)(D).

The chapter 7 trustee objected to all three of the debtor’s claims regarding the debtor’sHSA. The bankruptcy court agreed with the trustee. On appeal, the bankruptcy court’s ruling requiring turnover of the HSA to the trustee was upheld.

First, the appeals court observed that section 541(b)(7)(A)(ii) excludes from the bankruptcy estate funds withheld from wages for contributions to a health insurance plan regulated by state law. While Minnesota Statutes section 47.75 did authorize banks to act as custodians of health savings accounts, the statute did not actually regulate HSA’s. In fact, the Minnesota statute allowed withdrawal of the HSA funds for any reason, even non-medical purposes. This meant the HSA funds were property of the estate.

Next, the appeals court held that because the HSA fund account terms allowed withdrawal for non-medical purposes, the HSA could not be claimed exempt pursuant to sections 522(d)(10)(C) or 522(d)(11)(D). Once again, this was because the HSA terms allowed withdrawal for any purpose including non-medical purposes. The appeals courttherefore upheld the lower court’s ruling that the HSA account balance in excess of the debtor’s “wildcard” exemption had to turned over to the chapter 7trustee.

Image: copyright lenets_tan / Fotalia, used by permission.

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Craig W. Andresen is a consumer bankruptcy lawyer in Bloomington, Minnesota, with 22 years’ experience in consumer and small business bankruptcy cases. He is the Minnesota chair of the National Association of Consumer Bankruptcy Attorneys, and is a member of the Minnesota State Bar Association’s Bankruptcy Section. Mr. Andresen lectures often on the topic of consumer bankruptcy at local and national legal seminars.
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