Health Savings Accounts (HSA) May be Allocated in DivorceMay 30, 2019
A Health Savings Account (HSA) is a trust or custodial account to which contributions can be made on a pre-tax basis, up to certain annual thresholds, available to taxpayers who are enrolled in a high deductible health plan. The HSA participant may be self-employed, responsible for purchasing his or her own health insurance plan, or an employee whose company offers an HSA as an option (and which can also make pre-tax contributions to it). Not all health plans are HSA eligible, but plans that are must have a higher deductible than other non-eligible plans, and therefore typically have a lower premium. In theory, the funds saved on the lower premium can be deposited into the HSA to offset future medical expenses. Similar to an Individual Retirement Account, the funds contributed to an HSA are not taxed at the time they are contributed, or deposited, into the account.
The funds held in the HSA can be withdrawn and used tax-free to pay for qualified medical expenses. When used for such eligible expenses, there is never an income tax paid on the funds. If funds are withdrawn for a non-eligible expense before the participant reaches age 65, they will be subject to ordinary income tax and a 10% penalty. Funds in the HSA can be used for non-eligible expenses and subject only to ordinary income tax (no 10% penalty) after an account beneficiary enrolls in Medicare, becomes disabled, or dies. Once an individual is over age 65 and entitled to Medicare, funds can no longer be contributed to the HSA but the funds in the HSA can still be used for eligible medical expenses.
The funds in the HSA do constitute an asset in a divorce and are part of the marital estate. As such, they need to be included on the financial affidavit as an asset and are subject to equitable division in a divorce. During the pendency of the divorce, agreements or court orders may award use of HSA funds to the non-participant spouse in offsetting his or her eligible expenses as well as those of the children, so it is important to include such provisions in a proposed court order or agreement. After a divorce is granted, if one party is ordered to pay the uninsured medical expenses of a former spouse, the HSA participant may not use the HSA to pay such expenses without being subject to ordinary income tax, and if under age 65, the 10% penalty. This is because the ex-spouse is no longer a dependent and his or her expenses no longer qualify for tax-free withdrawal from the participant’s HSA.
If there is a court order (stipulated or otherwise) to allocate or award HSA funds from the HSA participant (Party A) to the non-participant (Party B), then Party B will have to open his or her own HSA into which participant Party A will make the required cash contribution. Party B will receive the funds tax-free even if Party B is not otherwise HSA eligible if the sole purpose of the new HSA is to receive a rollover from a former spouse’s HSA balance. This is true even if the non-participant Party B is not otherwise eligible to open his or her own HSA. The rollover is not a taxable event for Party A either. After the rollover, Party B can use the funds to pay qualified medical expenses, but unless Party B is also HSA eligible, he or she cannot make additional contributions to the rolled-over HSA.
Health Savings Accounts are governed by Federal Tax Law so be sure to confer with an accountant or tax attorney with any questions.
About the Authors: Judith A. Fairclough and Tony K. Sayess