Contributions to HSAs are not deductible or excludable from wages for California.

If the HSA contributions were excluded from an employee’s federal wages, the California wages will be higher by the amount of the HSA contribution. The “state wages” box of Form W-2 should reflect this higher amount. The difference between federal and California wages is an adjustment on Schedule CA.

Earnings in an HSA are currently taxable to California. This amount will not appear on either Form 1099-SA or 5498-SA; generally, the amount will be included on a year-end statement from the trustee., Or the taxpayer may have to request the information from the trustee or may be able to obtain it from his or her online HSA account.

A California taxpayer will have a basis in the HSA equal to the amount contributed (and not deducted for California) plus the earnings previously taxed. Therefore, if a distribution is made from the HSA that is not used to pay for qualified medical expenses, it is taxable for federal purposes, but will not be taxable for California to the extent of California basis.

An IRA, Archer MSA, HRA, or FSA distribution rolled into an HSA will be treated as a nonqualifying distribution, taxable and possibly subject to penalty, for California. However, the California basis of the HSA will be increased by the amount of the distribution from the other plans that is taxed.

Medical expenses paid or reimbursed with HSA distributions that aren’t deductible for federal purposes should be allowed as medical expenses for California itemized deductions (subject to the usual 7.5% of AGI reduction); adjustment is made on Schedule CA.