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DAVID NIANTIN <br />• Other HSA Distribution Facts <br />o State tax handling is dictated by the tax code in each state. Currently, these states <br />do not recognize state tax deductibility on HSA contributions: Alabama, California, <br />and New Jersey. <br />o Ensuring that expenses paid from an HSA are qualified medical expenses is the <br />responsibility of the account holder and not the employer. <br />o The account holder must keep adequate records concerning the use of the HSA <br />funds. <br />o Withdrawals for non-qualified expenses are included in gross income and are <br />subject to an additional 10% tax until the member turns age 65. This penalty <br />increases to 20% 1/1/2011. <br />o Individuals cannot also take a deduction on their tax return for medical expenses <br />if the expenses were reimbursed under an HSA. <br />Q: What happens to an HSA when a participate dies, terminates employment or turns age 65? <br />Upon participant's death: <br />o The HSA balance is available to reimburse medical expenses of dependent survivors. <br />o The HSA can continue to reimburse unpaid eligible expenses of the deceased. <br />o If the participant has designated a beneficiary who is not a spouse, the HSA balance is <br />available to reimburse medical expenses of the beneficiary on a taxable basis. <br />Upon termination of employment <br />The HSA remains an asset of the employee. There is no need for the employer to provide <br />COBRA continuation (except for the QHDHPj. Reimbursements for qualified medical <br />expenses continue to be available tax-free. Funding can continue only if the person is <br />covered by a QHDHP. <br />Upon turning age 65: <br />o Distributions for qualified medical expenses remain tax free. <br />o Distributions for any other purpose are subject to income tax at current rate only. <br />CONFIDENTIAL. <br />PAGE a <br />