Health Savings Accounts For California Employers

Employers considering Health Savings Account (HSA) contributions for their employees should be aware that California has not adopted state tax provisions permitting deductible HSA contributions. California taxpayers who contribute to HSAs (or have amounts contributed by their employers) must add back the amount deducted for federal tax purposes (or the amount contributed by the employer) for California income taxes. In addition, interest earned on HSAs is taxable in California. Perhaps most significantly, employer HSA contributions are subtracted from "wages" for FICA and federal withholding purposes. However, HSA contributions are included as wages for California payroll and withholding tax purposes.

California is considering legislation to conform with federal law. However, Assembly Staff has indicated that these provisions are "expensive" for budget scoring purposes and that the legislation is opposed by organized labor.