The Minnesota legislature recently passed a law to make the first $25,000 that a person has in a Health Savings Account or HSA exempt from bankruptcy and exempt from judgment creditors or debt collectors who are trying to collect.  This bill is called HF 2391  and was introduced by Senator Roger Chamberlain of District 38.

Effective August 1, 2018, people who use the Minnesota Bankruptcy Exemptions can now keep up to $25,000 in a Health Savings Account.  Before August 1, 2018 then anyone who used the Minnesota Bankruptcy Exemptions would lose the money in their Health Savings Account.  It was taken to pay creditors by the court, and the person filing bankruptcy had to be very careful about how they did their tax returns to avoid a tax penalty for an early withdrawal of the money.

This seemed very unfair to people who had been saving for escalating medical costs, especially when one considers that retirement accounts are protected in bankruptcy up to a nearly unlimited amount.

WHAT IS A HEALTH SAVINGS ACCOUNT?

A Health Savings Account is a special account where people can set aside money to pay for future medical expenses.   Just like when you contribute to a traditional IRA, you get a tax deduction for contributions to a Health Savings Account.  In 2018, single people can contribute up to $3,450 per year, and married couples or families can contribute up to $6,900 per year.  In order to contribute, you must also have a high deductible health insurance plan.  The money in a HSA may not be used to pay for health insurance premiums.

Money in a Health Savings Account may be used for meeting a health insurance deductible or out of pocket medical expenses such as prescriptions.

WHAT DOES THIS CHANGE?

Not very much, actually.  In Minnesota, you can choose whether to use the Federal Exemptions, or the Minnesota exemption in bankruptcy.  The exemptions are the list of property that people keep when they file bankruptcy.  Most people in Minnesota actually use the Federal Bankruptcy Exemptions instead of the Minnesota exemptions because the Federal Exemptions let people keep $12,000 of property of any sort, in addition to many other things.  This $12,000 wild card exemption is very useful for protecting things like money in bank accounts and tax refunds.

People using the federal exemptions to file bankruptcy in Minnesota would already be able to protect their Health Savings Accounts because they could use some of the $12,000 wild card exemption to protect it.

The change is that people using the Minnesota exemptions can now protect money in their HSAs also.  Homeowners tend to use the Minnesota exemptions because they allow up to $390,000 in equity in their homes.  The Federal exemptions only protect about $22,000 in equity, so homeowners tend to prefer the Minnesota exemptions.

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