Funds held in a Health Savings Account under Medicare are not exempt in bankruptcy.

As a California law firm, Borowitz & Clark practices in the 9th Circuit, however, we thought our clients should be aware of this decision from the Bankruptcy Appellette Panel in the 8th Circuit.

Health care is a fraught topic these days. With ever-increasing costs and ever-rising deductibles, it can be tough to make sure you’re covered. If your deductible is high, you might want to keep a little bit of cash in reserve just in case you or a loved one falls ill or gets injured. Medicare offers a Health Savings Account (HSA) for just that purpose. Saving for a rainy day is always a good idea, but you should be careful – if you file for bankruptcy, the trustee may be able to come after these funds.

What is a Health Savings Account?

An HSA is “a trust created or organized in the United States as a health savings account exclusively for the purpose of paying the qualified medical expenses of the account beneficiary.” 26 U.S.C.A. § 223(d)(1). You have total control over the funds in an HSA; you can withdraw them at any time and in any amount. However, you’ll suffer tax penalties if you use the funds for anything other than a “qualified medical expense.” Qualified medical expenses are basically the costs incurred below the deductible, before insurance starts to pay.

Kirk, a Minnesota policeman, received high-deductible health insurance through his job. To cover the costs of health care for himself and his family up to the deductible, Kirk contributed to an HSA. In re Leitch, 2013 W.L. 3722091 (Bankr. App. 8th Cir. 2013). When he fell on hard times and filed for chapter 7 bankruptcy, he believed his HSA funds would be exempt from liquidation. His bankruptcy trustee disagreed.

11 U.S.C.A. § 541(b)(7)(A)(ii)

Bankruptcy law exempts from the bankruptcy estate “any amount… withheld by an employer from the wages of employees for payment as contributions… to a health insurance plan regulated by State law.” 11 U.S.C.A. § 541(b)(7)(A)(ii). That amount is not part of the bankruptcy estate and the debtor will be able to keep it. Kirk argued that his HSA was part of an insurance plan regulated by State law and so should be exempt.

The court determined that an HSA was “simply a trust account.” Leitch, 2013 W.L. at 2. It noted that “beneficial taxation does not make the account a health insurance plan regulated by state law.” Id. Rather, it’s a “tax-preferred place to park money.” Id. It may be related to health care, used for health care, and created under Medicare, but it is not insurance.

The funds in Kirk’s HSA could have been used for anything, not just health care. So, the court ruled that the funds in his HSA were not exempt. They became part of his bankruptcy estate and were used to pay his creditors.

If you consider filing for bankruptcy, remember your HSA when you’re making the decision. Those funds aren’t automatically protected in bankruptcy and you may lose them. You might choose to preserve your HAS funds using a wildcard exemption, depending on what other property you have and what you want to keep. Talk to a bankruptcy attorney to make sure you’re not left out in the cold the next time you need medical care.

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