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We received a child support levy for a customer. The customer’s only account with the bank is a health savings account (HSA). Are HSA accounts exempt from child support levies? How should we report this transaction to the IRS? – IBA Compliance Connection

IBA Compliance Connection

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We received a child support levy for a customer. The customer’s only account with the bank is a health savings account (HSA). Are HSA accounts exempt from child support levies? How should we report this transaction to the IRS?

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We are not aware of any laws or regulations that would exempt a health savings account (HSA) from a child support levy.

However, while there may be no law preventing the levy on the HSA account, we believe you should report any disbursements from the account resulting from the levy as “prohibited transactions” — it is the HSA owner’s responsibility to establish that the distributions for child support resulting from the levy were spent on qualified medical expenses.

For resources related to our guidance, please see:

  • IRS Form 5305-C, Article VI (“The custodian is not required to determine whether the distribution is for the payment or reimbursement of qualified medical expenses. Only the account owner is responsible for substantiating that the distribution is for qualified medical expenses and must maintain records sufficient to show, if required, that the distribution is tax-free.”)