In a recently issued Chief Counsel Advice (CCA 200927019), the IRS stated that it can issue a levy on a taxpayer’s health savings account (HSA). What is even more interesting, in such a case, the taxpayer will be liable for a 10% excise tax on an HSA distribution to pay a tax liability, unless the distribution is made after the taxpayer becomes disabled or dies, or the payment is made after the taxpayer reaches normal retirement age.
Under IRC § 6321, when a taxpayer fails to pay a tax liability after notice and demand, a lien arises that attaches to all the taxpayer’s property and rights to property. Under IRC § 6331, the IRS is authorized to seize and sell the taxpayer’s property and rights to property subject to a federal tax lien.
An HSA is a tax-exempt trust created under state law exclusively for the purpose of paying the qualified medical expenses of an account beneficiary (e.g., an employee). The account beneficiary owns and controls the funds in his or her HSA. The account beneficiary may make a distribution from an HSA for any purpose. Any amount paid or distributed that is not used exclusively to pay the qualified medical expenses of the account beneficiary is included in his or her taxable income.
IRC § 223(f)(4) imposes a 10% excise tax on distributions not used for qualified medical expenses, unless the distribution is made after the account beneficiary becomes disabled (as defined in IRC § 72(m)(7)) or dies, or the payment is made after the account beneficiary reaches normal retirement age.
Chief Counsel Advice 200927019, relying on the U.S. Supreme Court’s holding in U.S. v. National Bank of Commerce, 472 U.S. 713 (1985), first concluded that the right to withdraw funds from an HSA was a property interest that could be subject to levy. The CCA noted that while the additional 10% tax imposed by § 223(f)(4)(A) is similar to the additional 10% tax imposed by § 72(t) on early withdrawals from a qualified retirement plan, only the latter excludes distributions on account of levy from a 10% percent tax. Under § 223(f)(4)(A), there are only three express exceptions to the imposition of the 10% tax—disability, death, or payment after the beneficiary’s normal retirement age. A levy isn’t one of those exceptions. For this reason, the CCA reasoned that the levy exception in § 72(t) wasn’t relevant to § 223(f)(4). A levy on an HSA under IRC § 6331 isn’t a distribution to pay qualified medical expenses. Accordingly, the CCA concluded that the account beneficiary was liable for the additional 10% tax imposed by § 223(f)(4) on the amount of the levy, unless, at the time of the levy, the taxpayer had attained age 65 or was disabled.
For information call (310) 550-6200.
By Igor S. Drabkin. Email Igor S. Drabkin
Copyright (c) 2009 Igor S. Drabki. All Rights Reserved.