November 15, 2018
Health Savings Accounts (HSAs) were created as part of a tax reform package in 2003 as a way to help taxpayers pay for medical expenses with pre-tax dollars, and have grown in popularity over the past 15 years. Surveys put the estimated number of Americans with HSA accounts somewhere between 21 million and 33 million. Regardless of the exact number, they are becoming more popular and it is not uncommon to find them among the assets of a divorcing couple.
To qualify to open an HSA, an individual has to be part of a high-deductible health plan. The contribution limit is determined by whether that person is on an individual or family health plan. Although HSAs are individual accounts (they cannot be opened in a joint name) money that has been contributed to the account can be used to pay for a medical expense related to the account holder, their spouse or dependents.
HSAs are easily overlooked in a divorce. Since they are neither a bank account nor an investment account, a couple may not think to list the account on a property report as an asset. In addition, the account owner may think of the HSA as just money set aside for medical expenses, not an “asset.”
However, HSAs can be, and should be, considered an asset to be included in the property division. One of the best features of the HSA is that if the money in the account is not used to pay for medical expenses, it can be withdrawn after age 65 without penalty (although subject to federal and state income taxes) and used for any purpose. Some people look at the HSA similarly to an IRA, contributing tax-deductible dollars today to be accumulated and withdrawn in retirement. Thus, it should be treated as a tax-deferred asset for property division purposes. This type of account should be added to your fact-finder or asset/liability checklist.
Contrary to popular belief, an HSA account can be divided. Just like any other investment or bank account, it can be split into two accounts. As long as the receiving spouse transfers her money into another HSA it retains its tax-advantaged status. This spouse can also contribute to her new HSA account – if she is on an eligible high-deductible health plan - and can withdraw money tax-free for her own or her dependents’ medical expenses (but not for the ex-spouse.)
Often, when we ask about the existence of an HSA we are met with the reply that an account exists, but that the balance is going to be used soon, so we should just ignore it. Our point of view is that this account should not be so easily dismissed. It should be treated like any other asset and its existence should be accounted for. Whether or not it is used in the near future may need to be decided through the divorce process. Because of its ability to deliver tax-free dollars, the HSA may be an attractive asset for a spouse who has known medical expenses in the future, especially if that spouse will not be eligible to make HSA contributions after the divorce.
So don’t overlook the Health Savings Account. You may be neglecting an important asset.