How Does the Date of Establishment Affect the Tax Status of Qualified Distributions?
William G. (Bill) Stuart
Combining gamification and education to optimize employee benefits performance.
This column is an excerpt (Question 79) from a book to be published later this year to help guide account owners, employers, benefits managers, and administrators understand Health Savings Account compliance issues. The format consists of a common question, an explanation in easy-to-understand English (often with an appropriate example), and a citation from government documents to support the answer. The book is designed to inform. It is not a legal document, and the contents should not be construed as legal advice.
Question: I became HSA-eligible Oct. 1, 2025. My Health Savings Account provider processed the paperwork Oct. 8. My first contribution was posted through my employer’s payroll system Oct. 11. After which date of service can I begin to reimburse qualified expenses tax-free: Oct. 1, Oct. 8, or Oct. 11?
Answer: The answer depends in part on the state whose trust laws govern your Health Savings Account.
Here, we introduce the critically important topic of establishing a Health Savings Account. IRS Notice 2004-2, the earliest guidance, repeatedly referred to the term establish, but did not define it. It indicated that Health Savings Account owners couldn’t reimburse qualified expenses that they incurred before they established their accounts.
Not until 2008 did the Internal Revenue Service provide concrete direction. It deferred to state trust law. In doing so, it finally provided the clarity that Health Savings Account owners needed, but without creating the uniform national standard that account providers and owners sought.
A Health Savings Account is a trust. The 2008 guidance brought state trust law to bear on Health Savings Account compliance, one of the few instances in which state laws affect the accounts. In most states, trust owners must meet three requirements to establish a trust:
Until all three requirements are met, a trust is not established under the laws of most states. In your question, your Health Savings Account isn’t established until Oct. 11 – the date that the first deposit is posted to the account.
This date is important because you can’t reimburse tax-free from your Health Savings Account any qualified expenses that you incur before Oct. 11 – ever. It’s critical that you open and make an initial deposit into your account as soon as possible – ideally immediately – once you become HSA-eligible. Every day that you delay making the first contribution is another day whose qualified expenses you can’t reimburse tax-free from your account.
In response to this guidance, the State of Utah amended its trust law in 2009 to provide favorable treatment to Health Savings Accounts governed by Utah law. The Utah amendment allows owners to establish their accounts back to the date that they enrolled in HSA-qualified coverage, as long as they complete the establishment process by the due date of their personal income tax return for that year (generally April 15 of the following year).
Given the facts in your question, a Health Savings Account governed by Utah trust law can be established retroactively to Oct. 1, 2025, if the owner opens the account by April 15, 2026. She can then reimburse tax-free all qualified expenses incurred on or after Oct. 1, 2025.
The Utah law creates confusion in certain circumstances.
Example: You enrolled on an HSA-qualified plan Jan. 1, 2025. You participated in your employer’s 2024 general Health FSA with a grace period and carried a balance into the grace period (which ends March 15, 2025). You’re not HSA-eligible under federal tax law until the first day of the first month that you don’t have any disqualifying coverage, or April 1, 2025.
Utah trust law allows you to establish your Health Savings Account back to Jan. 1, 2025. But federal tax law doesn’t recognize you as being HSA-eligible before April 1 in this example. Under federal tax law, you can’t reimburse tax-free any qualified expenses that you incur before you’re HSA-eligible (before April 1, 2025).
The Utah law creates this confusion because it allows Health Savings Account owners to establish their accounts retroactively to the date that they enroll in HSA-qualified coverage, regardless of whether they meet federal eligibility requirements on that date. Had the Utah law permitted retroactive establishment back to the date that the individual satisfied federal Health Savings Account eligibility requirements, it would have prevented this confusion.
The Utah law helps account owners who meet eligibility requirements as of the date that they enroll in an HSA-qualified plan. Administrative delays or procrastination doesn’t limit their opportunity to reimburse tax-free all qualified expenses that they incur since that date. That’s an advantage over other states’ trust laws.
The Utah law doesn’t help someone who meets Health Savings Account eligibility requirements after the first day of the month to reimburse tax-free any qualified expenses incurred during that first partial month. Federal law trumps state law, and federal tax law is clear that those individuals don’t become HSA-eligible until the first day of the first month that they meet eligibility requirements under federal law.
IRS Notice 2004-2:
Q-26. What are the “qualified medical expenses” that are eligible for tax-free distributions?
A-26. The term “qualified medical expenses” are expenses paid by the account beneficiary, his or her spouse or dependents for medical care as defined in section 213(d) (including nonprescription drugs as described in Rev. Rul. 2003- 102, 2003-38 I.R.B. 559), but only to the extent the expenses are not covered by insurance or otherwise. The qualified medical expenses must be incurred only after the HSA has been established. For purposes of determining the itemized deduction for medical expenses, medical expenses paid or reimbursed by distributions from an HSA are not treated as expenses paid for medical care under section 213.
IRS Notice 2008-59:
Q-38. When is an HSA established?
A-38. An HSA is an exempt trust established through a written governing instrument under state law. Section 223(d)(1). State trust law determines when an HSA is established. Most state trust laws require that for a trust to exist, an asset must be held in trust; thus, most state trust laws require that a trust must be funded to be established. Whether the account beneficiary’s signature is required to establish the trust also depends on state law.
Q-39. May a trustee treat an HSA as established before the date of establishment determined under state law, such as the date when HDHP coverage began?
A-39. No. But see Q&A-40 and Q&A-41 of this Notice concerning the establishment date for HSAs in connection with rollovers, or where a previous HSA was established.
Title 75, Chapter 4, Part 4, Section 401 of the Utah Uniform Trust Code:
Section 401: Methods of creating trust.
(2) A health savings account is established on the first day an individual is covered by a high deductible health plan, as defined in Section 223 of the Internal Revenue Code. The health savings account shall be opened with a trustee or custodian within the time prescribed by law, without extensions, for filing a federal income tax return for that year. A health savings account is established regardless of a transfer of cash or other property to the account and, unless required by the trustee or custodian, it is not necessary for any party to sign a health savings account trust or custodial agreement regarding the health savings account.
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The content of this column is informational only. It is not intended, nor should the reader construe the content, as legal advice. Please consult your personal legal, tax, or financial counsel for information about how this information applies to you or your entity.
HSA Question of the Week is published every week, alternating every other Wednesday with HSA Wednesday Wisdom and every other Monday with HSA Monday Mythbuster.
HR, Total Rewards, Employee Benefits Subject Matter Expert
1moBill, thanks for highlighting this. First, with respect to naming a beneficiary, can a HSA agreement include a default order/designation, e.g., spouse, if no spouse, children, if no children, parents, if no parents, siblings, if no siblings, estate? If so, why wouldn't every HSA agreement include such a default? Second, why wouldn't/shouldn't every employer who has an employee enrolled in a HSA-capable plan add a $1 default on the effective date of coverage, to get the claims clock running?
Making smart healthcare choices easier and more affordable for individuals and businesses. Speaker, Author, Coach
1moYou always bring such clarity to what I consider as the savings plan everyone should consider having. Too many people I talk to seem to be “spooked” at the idea of a high deductible health care plan, thinking that deduction is HIGH. When some of those plans have that deduction as little as $1700, and allow care that doesn’t affect that deduction. As you have pointed out elsewhere, there are so many advantages to HSA’s. Thanks for your work.