My family has a Health Savings Account (HSA) so we can pay for out-of-pocket medical expenses not covered by insurance, although it would be more accurate to call it a health Spending account since we never seem to save much in that account.

The basic idea of an HSA is to give consumers a tax benefit to purchase a high-deductible health insurance plan. Such plans do not cover any medical expenses until the high deductible amount is reached and this is supposed to make consumers more leery of rushing to the doctor to treat minor problems.

Money deposited into a HSA grows tax-free and can be withdrawn tax-free for qualified medical expenses. Individuals may invest up to $3,350 and families may invest $6,750 into an HSA each year.

If the family stays healthy and contributions are made automatically, it is possible to save up a decent pile of money in an HSA.


Unfortunately, there are no court rulings on this topic yet.  However, there are some good arguments to make that the funds should be protected.

Nebraska Statute 25-1563.01 provides the following protection:

In bankruptcy and in the collection of a money judgment, the following benefits shall be exempt from attachment, garnishment, or other legal or equitable process and from all claims of creditors: To the extent reasonably necessary for the support of the debtor and any dependent of the debtor, an interest held under a stock bonus, pension, profit-sharing, or similar plan or contract payable on account of illness, disability, death, age, or length of service unless:

(1) Within two years prior to bankruptcy or to entry against the individual of a money judgment which thereafter becomes final, such plan or contract was established or was amended to increase contributions by or under the auspices of the individual or of an insider that employed the individual at the time the individual’s rights under such plan or contract arose; or

(2) Such plan or contract does not qualify under section 401(a), 403(a), 403(b), 408, or 408A of the Internal Revenue Code.

Clearly the funds in an HSA are payable on account of illness, so it would seem that the funds should be protected.

How about the 2nd condition that the plan qualify under the Internal Revenue Code sections 401(a), 403(a), 408 or 408A?

The tax qualification of Health Savings Accounts are created in Internal Revenue Code Section 223, but that code section references IRC 408.  Is referring to Section 408 enough to meet the requirement of this protection?  It is impossible to say, but as a general rule exemption laws are to be interpreted liberally.

If an HSA is not protected by 25-1563.01 the funds would certainly be protected under the Wildcard exemption of 25-1552, but that exemption is limited to $2,500.

Until we have a written court opinion on this topic, I would recommend great caution when filing bankruptcy when there are substantial funds on deposit in an HSA.

Image courtesy of Flickr and GotCredit.