April 20, 2024

End unnecessary harmful taxation of California’s health care savings – Orange County Program

California’s unique cost of living is across all industries, and healthcare is no exception. Health care was spent in California as a whole $405 billion in 2020, growing faster on an annual average basis than health spending in the US as a whole.

Almost 40% of Americans the cost has put them off going to the doctor and getting the care they need. This is unacceptable. Even worse, when Californians try to save money on their health care costs, our state taxes them for it.

Many Americans open Health Savings Accounts (HSAs) to save money for current and future health care costs including medical, dental, vision and prescription costs. Nationwide, there are over 35 million HSA accounts, and the US is expected to approach 43 million accounts by 2025. More than half of individuals with HSAs live in zip codes where the median income is below $75,000 per year. In California, more than 5 million people, including dependents, are covered by HSA. Families and individuals understand that HSAs allow them to decide how and when to spend their medical expenses and give employers the ability to help pay for deductibles, copayments and coinsurance.

For most of the country, HSAs are tax-free, and not subject to federal income tax. However, California taxes HSA contributions and taxes employers who contribute to their employees’ HSAs. Workers who save money in these accounts to help lower their monthly premiums or pay for out-of-pocket medical expenses, and employers who decide to contribute to the employee’s HSA are taxed to try to cover these necessary health care costs.

Here’s an example: Angela is a California employee enrolled in family coverage through her consumer-directed health plan. She contributes $3,000 to her HSA through payroll and her employer contributes $1,000 to the HSA. For federal income tax purposes, Angela’s and her employer’s HSA contributions are pre-tax and tax-free. In California, Angela’s HSA contributions are reported as taxable income, raising her state taxes, while her employer’s contributions to her HSA are treated as after-tax contributions.

This is a direct attack on low and middle income families by a state intent on taxing its hardworking citizens in any way possible. This tax on health care savings is so unusual that, outside of California, only New Jersey penalizes households that rely on HSAs in this way.

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