Jay wrote:

- quote -

True. California doesn't recognize HSAs.

- quote -

Too late now, as you've already done it. I would have
opened the HSA with the first contribution payment and left
the MSA alone. Your plan administrator should have been
aware of your problem with your state of residence and not
forced the conversion.

- quote -

Another fine example of how California screws its people.

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Up through 2003 I had an MSA. At the start of 2004, the plan
administrator planned to roll it over to an HSA. That was ok
for me because a change of employment status made me
ineligible to contribute any more into the MSA.

But I live in California, which does not conform with the
federal HSA plan (though it conforms for MSAs). So
California wants to tax the rollover as a non-qualified MSA
distribution on the state return (ref.: FTB form 3805P
instructions, page 3). Ouch!

Consider the following (re-)characterization of the
MSA-to-HSA transition. Assuming the plan administrator goes
along, is there anything improper about it? Anything
disadvantageous to me? The main idea is that (AFAIK) it's ok
to have an MSA and an HSA at the same time, so let them
overlap for the first months of '04. Specifically:

* On 1-1-04, rolled over ten dollars (a token amount) from
MSA to HSA. This establishes the HSA for the entire year,
allowing the maximum annual contribution to the HSA. The
rolled-over amount is tiny so the extra state tax is tiny.

* HSA remained in existence throughout '04 and forward into
the future. All '04 contributions went into the HSA.

* MSA remained in existence on 1-1-04, but no further
contributions were made into it.

* Starting 1-1-04, medical expenses were paid from the MSA.
This continued until the MSA was paid down to zero
(September '04). Then the MSA shuts down.

* Once the MSA shuts down, further medical expenses were
paid from the HSA.

Thanks for your ideas.

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