Are Health Savings Accounts Exempt from Creditor Claims in Illinois and Elsewhere?

Congress created Health Savings Accounts (HSAs) in 2003. 26 U.S.C. § 223. In the past fifteen years, Illinois courts have not issued any published decisions indicating whether funds held in a debtor’s HSA are exempted from a debtor’s bankruptcy estate or otherwise protected from creditors. As a result, it is unclear what will happen to the funds in a person’s HSA if that person files for bankruptcy in Illinois.

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. § 223(d)(1). A person can only make contributions to an HSA if that person has a “high deductible health plan.” 26 U.S.C. § 223(c)(1)(A), which is a health plan that requires the beneficiary to pay a certain amount of expenses before coverage begins. 26 U.S.C. § 223(c)(2)(A). The beneficiary of an HSA “has liberal access to the funds – indeed, the beneficiary is entitled to distributions from the account for any purpose. However, the beneficiary will incur tax penalties unless the funds are used for ‘qualified medical expenses,’ which are essentially costs of health care ‘not compensated for by insurance or otherwise.’” Leitch v. Christians (In re Leitch), 494 B.R. 918, 920 (8th Cir. B.A.P. 2013) (citations omitted).

When a person files for bankruptcy protection, all of their property becomes property of their bankruptcy estate pursuant to section 541(a) of the Bankruptcy Code, 11 U.S.C. § 541(a), subject to certain exceptions. Section 541(b) of the Bankruptcy Code lists types of property that are explicitly excluded from the bankruptcy estate. 11 U.S.C. § 541(b). Additionally, debtors may be able to claim certain property as exempt under state or federal law. Whether a HSA will be considered property of a debtor’s bankruptcy estate varies from state to state.

The 8th Circuit Bankruptcy Appellate Panel found that HSAs are not excluded from a debtor’s estate pursuant to section 541(b)(7) of the Bankruptcy Code. Leitch, 494 B.R. at 921. Section 541(b)(7) provides that the bankruptcy estate does not include “any amount withheld by an employer from the wages of employees or payment as contributions . . . to a health insurance plan regulated by State law whether or not subject to such title[.]” 11 U.S.C. § 541(b)(7)(A)(ii). The court noted that HSAs were created two years before the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) became law and reasoned that Congress would have excluded HSAs from property of the estate in BAPCPA if it had so desired. Leitch, 494 B.R. at 921. Moreover, the B.A.P. held that “since the funds in the HSA can be used by the beneficiary or any purpose . . . an HSA is not an insurance plan regulated by state law and, therefore, the HSA is not excluded from the bankruptcy estate by 11 U.S.C. § 541(b)(7)(A)(ii).” Id. The B.A.P. also held that HSAs are not covered by the federal exemptions listed in section 522(b)(1) of the Bankruptcy Code. Id. at 921-22.

Many states do not allow debtors to use the exemptions listed in section 522 of the Bankruptcy Code, and instead only allow debtors to use state law exemptions. Therefore, whether an HSA will be exempted from a debtor’s bankruptcy estate is often a function of state law. At least ten states have statutes that explicitly protect HSAs from creditors and exempt them from debtors’ bankruptcy estates: Florida, Indiana, Minnesota, Mississippi, Montana, Oregon, Tennessee, Texas, Virginia, and Washington. Fla. Stat. Ann. § 222.22(2), Ind. Code Ann. § 34-55-10-2(c)(8), Minn. Stat. 550.37(26), Miss. Code. Ann. § 85-3-1(g), Montana Code Ann. § 25-13-608(1)(l), Or. Rev. Stat. § 18.345(o), Tenn. Code Ann. § 26-2-105(b), Tex. Prop. Code Ann. § 42.0021(a), Va. Code Ann. § 38.2-5604(B), and Wash. Rev. Code § 6.15.020(4). The exemption statutes in each of these states, except Mississippi, specifically reference the federal statute that created HSAs, 26 U.S.C. § 223.

Courts have held that HSAs are not exempt from a debtor’s bankruptcy estate in several states, including Georgia, Ohio, Idaho, and Colorado, that do not explicitly include HSAs in their exemption statues. See In re Mooney, 503 B.R. 916 (Bankr. M.D. Ga. 2014); In re Lombardy, No. 11-1737, 2012 Bankr. LEXIS 827, at *12-14 (Bankr. N.D. Ohio Feb. 9, 2012), In re Stanger, 385 B.R. 758, 763-65 (Bankr. D. Idaho 2008), and In re Gardner, No. 12-12485, 2013 Bankr. LEXIS 2921 (Bankr. D. Colo. July 19, 2013). Courts in these states have declined to create a new exemption for HSAs.

For example, in In re Mooney, the bankruptcy court found “nothing in [the Georgia exemption statute] expressly exempts HSAs. The Georgia Assembly has amended the exemption statute three times since the development of HSAs; none of the amendments included any director or indirect references to HSAs.” 503 B.R. 916, 919 (Bankr. M.D. Ga. 2014).” In In re Gardner, the bankruptcy court declined to exempt the Debtors’ HSAs because “[n]o provision of Colorado exemption law exempts funds held by debtors in HSAs.” No. 12-12485, 2013 Bankr. LEXIS 2921, at *10-11 (Bankr. D. Colo. July 19, 2013). Similarly, in In re Stanger, the bankruptcy court noted: “While a policy protecting a debtor’s deposits in a qualified HSA from reach by creditors or a trustee would be laudable, none of the existing Idaho exemption provisions cover such deposits.” 385 B.R. 758, 765 (Bankr. D. Idaho 2008).

Illinois exemption statutes do not expressly protect HSAs from creditors. 735 ILCS 5/21-1001. If Illinois courts follow the reasoning of courts in other jurisdictions, they will not read a new exemption into the Illinois exemption statute and the funds in a debtor’s HSA will likely be considered property of that debtor’s bankruptcy estate. Illinois does, however, offer a “wildcard exemption” whereby a debtor may claim an exemption of up to $4,000 for “any other [personal] property.” 735 ILCS 5/12-1001(b). This means that a debtor with an HSA could claim up to $4,000 in that HSA as exempt property. If Illinois citizens wish exclude their HSAs from their bankruptcy estates, they will need to urge their legislators to amend the state exemption statute, 735 ILCS 5/21-1001, to explicitly include HSAs.