How to Divide an HSA During a Divorce

If you’re investing your health savings account (HSA) with the intention of using it years from now — say in retirement — to pay for medical expenses with tax-free dollars, your HSA account can grow into a pretty big asset.

Someone who opened an HSA in 2004 and invested their contributions, had nearly $60,000 saved up by 2018, according to the Employee Benefit Research Institute. For someone who started investing their HSA in 2010 the average balance was more than $23,000.

In the event you and a spouse decide to divorce, a sizable HSA account balance becomes an important part of the negotiation for how best to divide your assets.

Here are a few things to consider when deciding how to divide an HSA in a divorce:

An HSA CANNOT be used to pay for the medical expenses of an ex-spouse.

It’s not uncommon in a divorce for one spouse to stay on an an ex-spouse’s health insurance plan for a set period of time. Even so, if you have an HSA, you can’t make tax-free withdrawals from the HSA to pay for an ex’s qualified medical expenses. If you withdraw money from an HSA to pay the medical bills of an ex-spouse, you will owe income tax on the money, and a 20% penalty if the HSA owner is younger than 65.

Either spouse can always use an HSA to pay for a child’s medical expenses.

It doesn’t matter which parent claims the child as a dependent for tax purposes, either parent can use tax-free HSA dollars to pay for a child’s qualified medical expenses.

It’s an asset, just like an IRA or 401(k).

In most states, all assets are up for negotiation; only in the nine community property states are assets accrued during a marriage typically divided 50-50.

An HSA can be used like a traditional retirement account.

Every dollar withdrawn from an HSA to pay for a qualified medical expense can be used tax-free. That’s the same as a dollar withdrawn in retirement from a Roth IRA or a Roth 401(k). But keep in mind that any money in traditional IRAs or a traditional 401(k) will be taxed as ordinary income when withdrawn in retirement. When you are dividing assets in a divorce it is important to account for the future tax treatment when the money is actually used.

You will need to formally transfer ownership.

Check with your HSA provider on what paperwork it requires to formally transfer ownership. You may need to provide a copy of your court-approved divorce decree (or a legal separation), and complete a “transfer” form.

If you're looking for more specifics on how to handle your HSA during a divorce, we recommend consulting a lawyer and a finance professional to ensure that all of your assets are covered.