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Divorce and Health Savings Accounts

It's been 13 years since Health Savings Accounts (HSAs) started, and by now, many of the accounts have large balances. If you and your spouse are divorcing, how is the HSA going to be handled?

HSAs are tax-exempt accounts and contributions are generally made directly from an employee's pay. While there aren't any restrictions as far as income, they need to be used with health insurance plans that have high deductibles. Qualified medical expenses can be paid for out of HSA accounts, even if you aren't working at the same employer where you set it up or you are covered by Medicare.

In a divorce, an HSA is handled like an individual retirement account (IRA). The money in an HSA can be transferred between the soon-to-be ex-spouses. The party receiving part of the account can find a new administrator or trustee and can invest the balance as he or she sees fit. Any expenses for medical-related care that occurred before a new HSA is created cannot be reimbursed by the new HSA after its created.

In many divorces, one spouse may be required to keep the other spouse covered on his or her insurance. Once the divorce is final, though, the spouse responsible for providing insurance coverage can't use the old HSA to pay for his or her ex's medical expenses. If a withdrawal occurs in order to pay for those expenses, then the withdrawal will be taxed as regular income. There is also a chance of a 20 percent penalty.

Beneficiaries listed on an HSA account should be changed or at least reviewed in order to prevent an unwanted beneficiary from getting a portion or all of the balance in the account.

Divorce can be complex and complicated when investment and other accounts must be divided. The experience of an attorney knowledgeable in property division can be very beneficial.

Source: Morningstar.com, "Handling HSAs After Death or Divorce," Helen Modly, June 15, 2017

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