IRS can levy on health savings accounts

The IRS recently determined that it can levy on an individual’s health savings account (HSA) to satisfy a tax debt. Not only would the taxpayer lose all or part of the funds in the HSA, he or she would be liable for an additional 10-percent tax because the distribution was not used for medical expenses.

Levy

When the IRS levies on a taxpayer’s property it takes the property. This is different from a lien. A lien is a claim used as security for the tax debt. The IRS can levy on property that a taxpayer’s owns or it can levy on property that is held by someone else; for example, wages or bank accounts.

A levy is one of the strongest collection actions the IRS can take. Before the IRS can levy on your property, it must follow many procedural rules. Taxpayers also have the right to a collection due process (CDP) hearing.

HSAs

An HSA is a savings account set up by the individual’s employer or created through a bank, credit union or insurance company. Distributions from an HSA are excluded from gross income if they are used to pay medical expenses. Distributions not used for medical expenses are included in gross income and are generally subject to an additional 10-percent tax. An HSA is generally only available to individuals who are covered by a high deductible health plan (HDHP).

HSA levy

The IRS noted that the HSA beneficiary is entitled to a distribution for any purpose and not just for medical expenses. The HSA custodian or trustee may not restrict distributions to qualified medical expenses. The right to withdraw funds from an account is a property interest subject to levy. Therefore, the account beneficiary's right to withdraw funds from the HSA is a property right to which an IRS levy may attach.

(CCA 200927019)