Handling Heath Savings Accounts in a Divorce

Health Savings Accounts can help with the high costs of healthcare. With an HSA, you can put aside pre-tax income to use on qualifying medical expenses. HSA family accounts help pay medical expenses for families with children. In a divorce, the couple will have to divide their HSA plans along with other assets.

Couples can divide HSAs in a divorce and keep their tax-preferred benefits. For help with handling HSAs in a divorce, talk to a local divorce attorney about your options.

Understanding Health Savings Accounts in Divorce

Many people use Health Savings Accounts (HSAs) to set aside tax-exempt money from their paychecks for medical expenses. Tax-preferred treatment helps lower the cost of healthcare. HSAs can pay for a wide range of costs, from copayments to emergency room visits.

Like individual retirement accounts, HSAs have maximum annual contribution limits. For the most current HSA contribution limits, refer to the IRS guidelines or consult with a financial advisor.

• Family: $8,550
• Individual: $4,300

Americans can make maximum contributions to HSAs for as long as they are eligible (usually until they hit 65 and qualify for Medicare). HSAs are not like flexible spending accounts (FSAs) because they do not expire and continue to provide for certain healthcare expenses.

During marriage, families can contribute to their HSA for family medical expenses. After a divorce, the couple must divide any marital property, including HSAs. The divorcing couple can divide their HSA in the divorce decree. Post-divorce, each spouse will have to manage their own accounts for eligible medical expenses.

Property Division for HSAs

During the divorce process, the family’s HSA balance is divided along with other assets. It is up to the separating couple to decide how to divide money in the account. Couples with children often decide to give the balance of the HSA to the custodial parent. However, either parent can use HSA funds for qualified medical expenses for the children, regardless of who has child custody or claims them as dependents.

If the divorcing couple cannot decide how to divide the HSA, the court can decide. The court can divide the HSA 50-50 or keep it with one account holder in exchange for other assets. Generally, it is better for you and your former spouse to decide how to divide HSA money.

The process usually involves filling out a transfer form with your HSA provider. Your provider may need a copy of your divorce decree before making the transfer. Contact your HSA provider to find out about the process for separating HSA assets into your own account.

Carrying Over HSAs

You can leave money in an HSA during a divorce. You don’t need to withdraw the money or cash it out. You can use your HSA balance in the future for medical expenses. Since medical costs usually increase as people get older, holding onto the tax-free HSA will let account holders pay for future HSA-eligible healthcare expenses. Even if you change jobs, HSAs are portable, and you can move them to other qualifying providers.

After age 65, you can use HSA funds for non-medical expenses without penalty, but such expenditures will be subject to income tax.

Divorce Is a Qualifying Event

Most employers won’t let you make major benefit changes until annual enrollment or a qualifying event. A divorce is a qualifying life event, like marriage or the birth of a child. A divorce qualifies you, as the account holder, to make changes to your pre-tax HSA withholding, health insurance plan, and retirement plans.

Using HSAs to Pay for Ex-Spouses

After the divorce, you can’t use your HSA to pay for your ex-spouse’s medical expenses. In some divorces, an ex-spouse can temporarily stay on your health insurance plan. However, the HSA can only cover your medical expenses or your children’s expenses. Any spending for your ex-spouse’s medical costs after a divorce is taxable or subject to non-qualifying penalties.

HSA Transfers and Beneficiary Changes

In divorces, HSAs are similar to Individual Retirement Accounts (IRAs). Divorcing spouses can transfer HSA funds between each other as part of their divorce agreement without tax consequences, provided the transfer complies with IRS regulations. As long as the money goes into a qualifying account, it is still categorized as an HSA for the spouse who receives it. 

Update your financial planning accounts after a divorce, including making changes to your beneficiaries.

Seeking Legal and Financial Advice

Avoid unintended tax consequences with the help of a divorce attorney. For HSAs and other assets, talk to an experienced divorce attorney to make sure you protect your property rights and your family’s health. Contact a local divorce lawyer for legal advice about handling Health Savings Accounts in a divorce.