By: Michelle Nicotera
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
In Leitch v. Christians (In re Leitch), The Eighth Circuit Bankruptcy Appellate Panel (the “BAP”) ruled that a health savings account (“HSA”) was not excluded from a debtor’s bankruptcy estate.[1] Kirk Leitch, a chapter 7 debtor, asserted his HSA was excluded under section 541(b)(7)(A)(ii) of the Bankruptcy Code,[2] which functions to exclude a health insurance plan regulated by state law.[3] The chapter 7 trustee objected to the debtor proposed exclusion.[4] The bankruptcy court agreed with the trustee and held that the HSA was property of the estate.[5] On appeal, the BAP affirmed the bankruptcy court.[6] While the BAP noted that the Minnesota statute states that a bank can “act as a trustee of certain types of accounts, including health savings accounts,” the court found that the HSA in question did not qualify as a state regulated health insurance plan.[7] Indeed, the beneficiary would “incur tax penalties unless the [HSA] funds are used for ‘qualified medical expenses,’ which are essentially costs of health care ‘not compensated by insurance or otherwise.’” The BAP further reasoned that the HSA was not a state regulated health insurance plan because the debtor, as the beneficiary to the account, had “liberal access to the funds” and was “entitled to distributions from the account for any purpose.”[8].
Section 541(b)(7)(A)(ii) provides that property of the estate does not include “any amount withheld by an employer from the wages of employees for payment as contributions to a health insurance plan regulated by State law . . . .”[9] The language of the provision suggests that Congress intended to “exclude the listed withholdings from the disposable income calculation under that provision.”[10] While there is significant case law that states HSAs are included in a debtor’s disposable income,[11] there are relatively few cases that address whether HSAs are excluded from the bankruptcy estate. In at least three of those cases, the bankruptcy court has held that an HSA was not exempt.[12] Even in states that have opted out of the federal exemption scheme, courts have held that the plain language of section 541(b) cannot be construed liberally to include HSA accounts as excluded property.[13] Because a fundamental tenet of statutory interpretation dictates that all the words in the statute should be given meaning, courts have held that exemptions cannot be construed to include HSAs.[14]
Leitch is a significant case for individuals who hold HSA accounts as a way to mitigate the costs of high-deductible insurance plans. While there are tax incentives for maintaining such an account, the law will not treat it as funds withheld by the employer and, in the absence of explicit language, the account will be included as property of the estate. If a chapter 7 trustee can access the funds in an HSA in order to satisfy unsecured creditors’ claims, the debtor will incur a substantial tax penalty because, assuming the debt is not medical in nature, the funds will be not have been used for “qualified medical expenses.” Unlike flex savings accounts, HSAs can potentially contain a large amount of money.[15] Therefore, the tax penalty, in addition to the loss of the funds in the account, could significantly compound the debtor’s financial problems.
[1] See Leitch v. Christians, 494 B.R. 918 (2013).
[2] Id. at 919–20. Leitch argued in the alternative that the HSA was exempt from his creditor’s claims as an illness benefit under sections 522(d)(10)(C) or (d)(11)(D). The BAP further concluded that the account was not exempt under sections 522(d)(10)(C) or (d)(11)(D) because access to the account was unrestricted and the funds could be used for non-medical expenses. Id. at 921.
[3] Id. at 921 (citing 11 U.S.C. § 541(b)(7)(A)(ii) (2006)).
[4] Id. at 919.
[5] Id.
[6] Id.
[7] Id. (citing Minn. Stat. § 47.75 (2007)).
[8] Id. at 920 (citing I.R.S. Notice 2004-50, 2004 WL 1636921 at Q-79) (emphasis added).
[9] 11 U.S.C. § 541(b)(7)(A)(ii) (2006).
[10] Collier on Bankruptcy, ¶ 541.23 (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2009), available at LEXIS, 5-541 Collier on Bankruptcy P 541.23.The BAP in Leitch noted that legislative intent does not support a finding that HSAs should be exempt from the bankruptcy estate. The court noted that when Congress added § 541(b)(7) to the Bankruptcy Code as part of the 2005 BAPCPA amendments, health savings accounts had already been created and, in fact, had existed for two years. Leitch 494 B.R. at 921. The court stated that Congressional silence on HSAs is indicative of Congress’s intention to not allow such accounts to be excluded from the estate. The fact that “Congress did not specifically mention HSAs in its amendments,” in addition to the fact that the funds could be used for any purpose, led the court to conclude that Congress could not have meant for HSAs to be considered health insurance plans regulated by state law. Id.
[11] In re Maura, 491 B.R. 493 (2013); In re Melancon, 400 B.R. 521 (2009); In re Harris, 353 B.R. 304 (2006). These cases, among others, cited the specific and unambiguous language of 11 U.S.C. § 707(b)(2)(A)(ii)(I) which states that a debtor’s disposable income includes “reasonably necessary health insurance, disability insurance, and health savings account expenses”(emphasis added). These cases addressed issues of ambiguity regarding other expenses listed within § 707 and there are few cases that address health savings accounts specifically.
[12] Leitch, 494 B.R. 918; In re Lombardy, 2012 WL 435816 (2012); In re Stranger, 385 B.R. 758 (2008). In re Lombardy provides an example of
[13] See In re Stranger, 385 B.R. 758 (2008) (holding that state exemptions in Idaho, which has opted into federal exemptions scheme, for health aids and benefits for medical expenses did not apply to HSA accounts). Cf. Lombardy, 2012 WL 435816 (holding debtor’s HSA was not exempt even though Ohio has opted out of federal exemptions scheme because Congress exercised power to preempt state court exemptions by enacting BAPCPA and creating a category of exemption rights that may be exercised by debtor even if debtor’s state has opted out) The policy behind § 522(b)(3)(C) is to prevent complete depletion of debtor’s funds by allowing for exemption of retirement funds “to the extent that those funds are in a fund or account that is exempt from taxation under the relevant sections of the Internal Revenue Code.” In re Malsch, 400 B.R. 584, 592.
[14] Lombardy, 2012 WL 435816 at 3–4. The Court held that Congress intended to limit the exemptions under § 522(b)(3)(C) to the standard meaning of “retirement fund” which would not include HSAs.
[15] Cash Money Life, Personal Finance and Career, http://cashmoneylife.com/comparing-flexible-spending-account-to-health-savings-account/ (last visited Nov. 4, 2013). Unlike flex savings accounts, HSA accounts can earn interest and the funds held in an HSA are not forfeited if they are not used within the year. Furthermore, flex savings accounts are not portable; the funds will be lost if an individual leaves their employer. In contrast, HSAs are portable and can continue to accumulate funds even if the individual changes employers or insurance plans.
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