Navigating Health Savings Accounts (HSAs) during your MN divorce can be a complex task. Divorces involve the division of assets, and HSAs are no exception. It is crucial to understand the rules and regulations surrounding HSA transfers and how they can impact both parties involved. Below, we will explore the guidelines for HSA transfers in divorce and discuss their implications.
For those unfamiliar, an HSA is a savings account that allows individuals to contribute pre-tax dollars for qualified medical expenses for themselves or their family members. Contributions to an HSA are tax-deductible, and any investment gains within the account are tax-free. Withdrawals from the HSA for qualified medical expenses are also tax-free. However, distributions from the account for non-qualified medical expenses or other reasons are taxable, and individuals below the age of 65 may face an additional 20% tax on such distributions. Understanding these rules is crucial to maximizing the tax advantages of an HSA during a divorce.
Contrary to popular belief, an HSA holds monetary value and can be divided in a divorce, similar to other financial accounts. While many view an HSA solely as a reserve for medical expenses, the balance accumulated in an HSA over time can have significant value.
It is important to note that after the date of divorce or dissolution of marriage, an individual can no longer reimburse their ex-spouse’s eligible medical expenses tax-free. This is true regardless of what is ordered or agreed upon during the divorce negotiations or written into the decree. Any distributions made after the date of divorce would be included in the taxable income of the individual HSA owner and may be subject to the additional 20% tax, depending on the account owner’s age. Even if a court order mandates an individual to maintain their ex-spouse on a medical plan or cover a portion of their ex-spouse’s out-of-pocket medical expenses, these expenses cannot be reimbursed tax-free from the HSA.
Similar to Individual Retirement Accounts (IRAs), HSAs can be transferred between spouses as part of a divorce or separation agreement. An ex-spouse has the option to open their own HSA with an administrator of their choice, regardless of their HSA-eligibility. This new HSA serves as the recipient of the transfer from the existing HSA balance, as directed by a court order. It is important to note that transferring funds from one HSA to another as part of a divorce settlement does not trigger tax consequences for either party, as long as the transfer is executed properly. The funds transferred pursuant to a divorce or separation agreement retain their tax-advantaged status, allowing the ex-spouse to use them for qualified medical expenses in the future, including expenses for eligible children, regardless of the child’s tax-dependent status. However, it is essential to consider that the ex-spouse’s ability to make new or additional contributions to the newly established HSA depends on their own coverage under a High Deductible Health Plan (HDHP), if any.
Divorce involves significant financial considerations, and understanding the implications of HSA transfers can provide tax advantages for both settlement purposes and the financial future of both parties. If you need assistance in navigating these options or executing a non-taxable division, Divorce Smart is here to help.