Kevin Qualls Family Law
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Health savings accounts and divorce

Health savings accounts (HSA) have existed for only 13 years. These are now becoming a new and large asset, sometimes, over $100,000 that must be divided in a California divorce.

A HSA is a custodial account that is exempt from taxes, which must be used for a high deductible and qualified health insurance plan. A person may continuously withdraw from a HSA to pay for qualified medical expenses, even after being ineligible to make contributions.

The current maximum contribution for a family is $6,750 and $3,400 for a single person under 55, and $4,400 for those over 55-years-old. These contributions are inflation-indexed and investments may be aggressive or conservative. HSA accounts are usually allowed to increase in value without being used to pay for medical expenses.

During property division in a divorce, an HSA is treated like an individual Retirement Account. Interest from these accounts may be transferred between the couple as part of their divorce or separation agreement. This is not a taxable transfer because it is keeps its status as an HSA for the recipient.

And, an HSA that is transferred may be transferred to a new trustee or administrator. The investor can invest it within their discretion.

But, expenses that were sustained before a new HSA is created do not qualify for reimbursement. A trustee-to-trustee transfer, instead of a direct rollover of assets, may address this.

The IRS allows a parent to use the HSA for eligible expenses for the couple's children. This allowance does not depend on which parent has physical child custody or claiming the children as dependents for their taxes.

A spouse may keep their former spouse on a medical plan for some time after divorce but they cannot use their own HSA to cover that spouse's eligible expenses. Any withdrawals for those medical costs are taxable as ordinary income. Unless the taxpayer is at least 65, a 20 percent penalty may be levied.

A spouse may also contribute to their former spouse's HSA. However, the HSA owner may claim the tax deduction. Spouses should keep beneficiaries updated to prevent unintended distributions.

Divorce requires planning on distribution of assets and covering living expenses. An attorney can help address these divorce legal issues and seek a fair and reasonable settlement or decree.

Source: Morningstar, "Handling HSAs after death or divorce," Helen Modly & Tommie Monez, June 15, 2017

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