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The Future of Health Savings Accounts in an Illinois Divorce

By Nottage and Ward on January 3, 2022

A divorce can be one of life’s most stressful events. The former partners may be ready to move on with their lives, but the division of marital property must be resolved – including any funds in a Health Savings Account (HSA).

What is an HSA?

An HSA is a type of savings account that allows you to save money, pre-tax, to pay for qualified medical expenses. The untaxed money in the account can be used to pay for a range of medical costs, including deductibles, copayments, coinsurance and some other costs.

Many people who are enrolled in high-deductible health insurance plans are eligible for enrollment in an  HSA. The money can flow into the account with automatic payroll deductions. You will be provided with a debit card (or checks) linked to the HSA account to pay for your eligible medical expenses.

The funds in the HSA, if any remain at the end of the year, roll over, without loss of contributions. The money in the account can grow into a significant amount, as the allowed contribution for families is $7,300 for 2022 ($3,650 for individuals). These accounts are specifically for eligible expenses, and if used for any other expense, will generate taxes. In a divorce in Chicago, the HSA funds are just one of assets of a marriage that must be divided in a divorce.

HSA Funds and Divorce

An HSA is owned by one spouse, and can be divided, with the funds transferred (in part or in full) to the other spouse. The asset transfer from one spouse to another is not taxable when transferred to another HSA. If transferred to a regular bank account, the transfer will generate taxes. Younger, healthy people may have accrued a significant balance in an HSA, as they may rarely need to be reimbursed for medical expenses. As one element in property division, all marital assets must be divided. One advantage of a transfer of HSA funds is that when transferred to another HSA account, no taxes are due.

How to Divide an HSA in Divorce

When HSA funds are divided in a divorce, the financial institutions require specific forms to be filed, along with a copy of the divorce decree. The funds are a marital asset, just like the funds in retirement accounts. The ownership of the account must be formally transferred, and financial institutions each have a set of transfer forms that are required to be transferred divorce or legal separation.

Paying an Ex-Spouse’s Medical Expenses with an HSA

After a divorce, you cannot pay for a former spouse’s eligible medical expenses without generating taxes. In cases in which one spouse is required to continue to pay for health insurance for a time, the HSA funds cannot be used tax-free for eligible medical expenses. This is true even in cases in which a court order requires you to pay some portion of a former spouse’s medical expenses. However, the children’s eligible medical expenses can still be paid from an HSA account.

Property Division in Chicago Divorce Cases: Why You Need a Lawyer.

A divorce, even when the two former partners generally agree on issues such as child custody and “who gets what,” can be complicated. The division of assets, including HSA accounts, must be correctly performed to avoid unnecessary taxes and a fair split. At Nottage and Ward, LLP, we are very experienced in the most complex property division issues in a divorce, including HSA funds, business valuations and all others. We have over 25 years of experience representing our clients in high net worth divorce cases.

Call (312) 332-2915 today for a divorce attorney in Chicago you can trust to professionally manage even the most complex matters of property division.