On April 15 the House passed the Taxpayer Assistance and Simplification Act of 2008. The provision must now be taken up by the Senate where its prospects are less certain, and the Bush administration has already indicated that it would veto the proposal.

If enacted, effective January 1, 2010 the bill would limit the tax exclusion for health savings account distributions to qualified medical expenses which are substantiated according to flexible spending arrangement rules. In addition, the bill would require HSA custodians to report the total amount of non-substantiated HSA distributions from the prior calendar year to the IRS and the account holder by January 15 of each year.

Current HSA guidance indicates that HSA account holders may take distributions from the HSA for any reason and that account holders are ultimately responsible for self reporting distributions not used for qualified medical expenses; HSA custodians are not obligated to request substantiation with respect to any distribution. If the bill ultimately becomes law, account holders could still take distributions from the HSA for any reason; however, HSA custodians, or their designee, would be obligated to request substantiation in conjunction with the distribution in order to satisfy the reporting obligation created by the bill.