HSAs and California

California does not conform to the federal treatment of Health Savings Accounts (HSAs) [source].

Employer contributions to an HSA are deductible from an employee’s gross income for federal purposes but are not deductible for California purposes and have to be added back in as income. 

Interest and dividends in an HSA are not counted as income for federal purposes but are for California. 

Payments from an HSA for “qualified medical expenses” are excludable from gross income for federal purposes but cannot be used as a medical deduction. 

California allows the payments to be taken as a medical expense deduction. 

The payments are also not taxable for California purposes.