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#1731176 - 08/15/12 05:16 PM
Health Savings Accounts
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Member
Joined: Jun 2011
Posts: 51
Midwest, United States
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Is a bank required to monitor health savings accounts for potential prohibited transactions? What responsibilities does a bank have regarding transactions going through the account?
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#1731286 - 08/15/12 06:18 PM
Re: Health Savings Accounts
Auditor412
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10K Club
Joined: Jul 2001
Posts: 83,393
Galveston, TX
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No and none.
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#1731473 - 08/15/12 09:23 PM
Re: Health Savings Accounts
Auditor412
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Member
Joined: Jun 2011
Posts: 51
Midwest, United States
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What if we know an account has prohibited transactions, should the bank take any action?
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#1733508 - 08/22/12 02:18 AM
Re: Health Savings Accounts
Auditor412
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10K Club
Joined: Jul 2001
Posts: 83,393
Galveston, TX
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"in the event you become aware of the account beneficiary engaging in a prohibited transaction. As the custodian you must treat the account as if it was distributed to the beneficiary as of the first day of the taxable year in which the prohibited transaction occurred."
Not that I don't believe you, as it has been several years since I was personally active in the management of an HSA portfolio, but could you possible provide any IRS citations that state or support this fact?
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#1734557 - 08/23/12 11:10 PM
Re: Health Savings Accounts
Auditor412
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Gold Star
Joined: Jul 2004
Posts: 345
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No worries rlcarey! Prohibited transactions are covered in Internal Revenue Bulletin 2008-29: http://www.irs.gov/irb/2008-29_IRB/ar11.html#d0e1258 Q-37. What are the consequences if account beneficiaries or other disqualified persons enter into a prohibited transaction with an HSA?
A-37. Section 223(e)(2) provides that rules similar to the rules of §§ 408(e)(2) and (4) apply to HSAs. Therefore, account beneficiaries may not enter into “prohibited transactions” with an HSA (e.g., the account beneficiary may not sell, exchange, or lease property, borrow or lend money, pledge the HSA, furnish goods, services or facilities, transfer to or use by or for the benefit of himself/herself any assets of the HSA, etc.). If an account beneficiary engages in a prohibited transaction with his or her HSA the sanction, in general, is disqualification of the account. Thus, the HSA stops being an HSA as of the first day of the taxable year of the prohibited transaction. The assets of the beneficiary’s account are deemed distributed, and the appropriate taxes, including the 10 percent additional tax under § 223(f)(4) for distributions not used for qualified medical expenses, apply.
It also mirrors the prohibited transaction rules for IRAs, for which it's been clarified several times to me direcly from persons at the IRS that a custodian is responsible for issuing a 1099-R as if the account was distributed as of the first day of the taxable year in which the prohibited transaction occurred.
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#1734765 - 08/24/12 03:52 PM
Re: Health Savings Accounts
Auditor412
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10K Club
Joined: Jul 2001
Posts: 83,393
Galveston, TX
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I am well aware of that Q&A and unless I see something in writing that says the custodian is responsible for making that determination on an HSA, I would not be taking those actions. IRA's are totally different.
I can spend money on a medical expense through other means and spend a like amount of money out of my HSA on anything that I want. The bank making a determination that any specific transaction conducted by the cusotmer is prohibited is impossible.
The only prohibited transactions that I see on a HSA account that the custodian can be sure is a prohibited transaction is when the Bank pays the HSA into the overdraft. Other than that, I would not be worrying about any payee on any payment going out of a HSA.
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#1734816 - 08/24/12 04:38 PM
Re: Health Savings Accounts
Auditor412
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10K Club
Joined: Jul 2001
Posts: 83,393
Galveston, TX
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Good point, I guess it depends on actually what we are talking about. Most times when someone starts talking about a customer engaging in prohibited transactions it is because they see them use their HSA debt card at McDonalds.
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The opinions expressed here should not be construed to be those of my employer: PPDocs.com
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