Many people use "health savings accounts" to set aside tax-exempt money from their paychecks for medical expenses -- everything from routine check-ups to unexpected emergency room visits. Like individual retirement accounts, there are maximum annual contributions for HSAs. For a family, it's currently $6,750. For an individual, it's $3,350. Like IRAs, the maximum contribution is larger for individuals over 55 ($4,350).
Americans can make maximum contributions to HSAs for as long as they're eligible (usually until they hit 65 and qualify for Medicare). However, they may not need to withdraw anywhere near the balance in their accounts for medical expenses. That's fine, because HSA balances can be used in the future for medical expenses, which often increase as people get older. Therefore, many people have a tidy sum in their HSAs.
Know the Regulations and Potential Tax Consequences
If you divorce, the balance in a spouse's or family's HSA will need to be divided along with other assets. The question for the couple and their attorneys is determining how to divide it. It's also essential to know the regulations regarding HSAs for divorced couples regarding withdrawals for medical expenses. For example, HSA funds can continue to be used for qualified medical expenses for the children, regardless of who has custody of them or is claiming them as dependents.
However, a person can't use funds from his or her individual HSA to cover an ex-spouse's medical expenses without confronting the taxes and penalties they'd face if they used the funds for non-medical expenses. This is true even if that spouse is keeping the other one on his or her health insurance plan for a time, as is often the case.
HSA Transfers and Beneficiary Changes
In divorces, HSAs are handled the same way as IRAs are. HSA interest can be transferred from one spouse to the other as part of their divorce agreement without being taxed. That money is still categorized as an HSA for the spouse who receives it. As with IRAs and other retirement and investment accounts, it's essential to make sure that you look at and update your beneficiary designations on your HSAs when you divorce.
To avoid unintended tax consequences with HSAs and other assets, it's probably wise to seek the advice of a trusted tax professional and financial advisor other than the ones you have consulted as a couple. Your family law attorney can likely recommend people in your area.
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