Why does NJ not recognize my HSA?

NJ is one of only two states (along with California) that does not recognize HSAs for state income tax purposes. This means contributions are not deductible, investment earnings inside the HSA are taxable annually, and your NJ wages (W-2 Box 16) will be higher than your federal wages (Box 1) because HSA contributions are included.

What happens to my HSA when I enroll in Medicare?

Once enrolled in Medicare (Part A, B, or D), you can no longer make new HSA contributions. However, you can still use existing HSA funds tax-free for qualified medical expenses, and you can pay Medicare Parts A, B, C, and D premiums from your HSA tax-free (but NOT Medigap premiums).

What is the 20% penalty on HSA distributions?

If you take an HSA distribution for non-qualified expenses, you owe ordinary income tax plus a 20% additional penalty under IRC Section 223(f)(4)(A). The penalty does not apply after age 65, for disability, or upon death - after age 65, the HSA functions like a Traditional IRA for non-medical use (income tax only, no penalty).

HSA Tax Checklist - Health Savings Account Documents | Monaco CPA

HDHP Enrollment Verification

Proof of High Deductible Health Plan (HDHP) coverage
Coverage type: self-only or family (determines contribution limit)
Months of HDHP coverage during the year
Confirm you are NOT enrolled in Medicare (Part A, B, or D) - any Medicare enrollment ends HSA contribution eligibility
Confirm you are NOT covered by a general-purpose FSA or HRA (limited-purpose FSA is OK)

Contribution Documents

W-2 Box 12 Code W amount (total employer + employee pre-tax payroll HSA contributions)
Records of after-tax personal contributions made outside payroll
TY2025 limits: $4,300 (self-only) / $8,550 (family) - combined from all sources
If age 55+ by December 31: additional $1,000 catch-up contribution documentation
Form 5498-SA from HSA custodian (issued by May 31)

Distribution Documents

Form 1099-SA from HSA custodian (Box 1 = gross distribution, Box 3 = distribution code)
Receipts for qualified medical expenses per IRC Section 213(d)
Qualifying expenses include: physician visits, prescriptions, dental, vision, mental health, medical equipment, OTC medications
Non-qualifying items: cosmetic surgery, gym memberships, general wellness supplements
Note: non-qualified distributions are subject to income tax plus a 20% penalty (exceptions: age 65+, disability, death)

NJ Non-Conformity Items (Critical)

Note: NJ does NOT recognize HSAs - contributions are NOT deductible on NJ-1040
W-2 Box 16 (NJ state wages) INCLUDES HSA contributions (will be higher than Box 1)
HSA investment earnings (interest, dividends, capital gains) are taxable by NJ annually
HSA custodians do NOT issue 1099s for in-HSA earnings - you must self-calculate from account statements
HSA account statements showing investment earnings for NJ reporting
NJ HSA basis tracking records (cumulative amounts already taxed by NJ to prevent double taxation)

Special Situations

Last-month rule documentation if contributing full annual amount based on December 1 eligibility
Excess contribution records if total contributions exceeded the annual limit (6% excise tax applies)
IRA-to-HSA transfer records if applicable (once-per-lifetime)
Medicare enrollment date if applicable (affects contribution eligibility)

HSA Tax Checklist

HDHP Enrollment Verification

Contribution Documents

Distribution Documents

NJ Non-Conformity Items (Critical)

Special Situations

Frequently Asked Questions

Related Pages

Have Your Documents Ready?

HSA Tax Checklist

HDHP Enrollment Verification

Contribution Documents

Distribution Documents

NJ Non-Conformity Items (Critical)

Special Situations

Frequently Asked Questions

Related Pages

Have Your Documents Ready?

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