Health Savings Accounts not protected in bankruptcy, 8th Circuit BAP holds

Many people today have “Health Savings Accounts”, to provide tax free access to income that can be used to pay qualified medical expenses. These accounts were created by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 and allow persons covered by a  “high deductible health plan” to save money tax free by payroll deduction for future medical expenses.

Generally, pensions and retirement plans are protected from creditors in a bankruptcy. The debtor in In re: Leitch tried to protect his account from being grabbed by the trustee in his bankruptcy, claiming it had the same protection and that it could be exempted as a disability or unemployment benefit, or as the proceeds of a personal injury claim.

The 8th Circuit Bankruptcy Appellate Panel affirmed the bankruptcy court in rejecting all these claims. The HSA account, it agreed, was a trust account to which the debtor had unrestricted access for any purpose. Although withdrawals to pay qualified medical expenses were tax free, the money could be withdrawn for other purposes, in which case it became taxable.

 People with these types of accounts will have to use other exemptions to cover them. In New Jersey and Pennsylvania, that exemption is the “wild card” exception under 11 U.S.C. 522(d)(5) which can afford protection up to a total of $12,050.00 for property that does not qualify for other exemptions.

As always, the most critical decision people in financial trouble can make is to get the right advice from professionals who have both the knowledge and the willingness to take time going over the details.

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