Dividing a Health Savings Account During a Divorce
Dividing assets during a divorce can be complicated, especially when it comes to accounts like Health Savings Accounts (HSAs). While HSAs are not traditional retirement accounts, they do have tax advantages and are often considered marital property if funded during the marriage. So, how do you divide an HSA in a divorce? One option is through a Qualified Domestic Relations Order (QDRO).
What is an HSA?
An HSA is a tax-advantaged account designed to help individuals save for medical expenses. It is typically paired with a high-deductible health plan (HDHP) and allows for pre-tax contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. Because the account is individually owned, only the named account holder can use the funds. This is why it is imperative to address the account, and divide it appropriately if it is a marital asset. However, dividing such requires careful handling to avoid unintended tax consequences. Unlike traditional bank accounts, HSAs have specific IRS rules governing their use and distribution.
Using a QDRO to Divide an HSA
A Qualified Domestic Relations Order (QDRO) is a legal order that allows for the division of certain retirement assets without triggering taxes or penalties. While QDROs are typically used for 401(k)s and pension plans, they can sometimes be used to divide an HSA in a way that ensures a fair distribution between spouses.
Steps for Dividing an HSA Using a QDRO:
- Determine the Marital Portion – Identify how much of the HSA was accumulated during the marriage, as only that portion is subject to division.
- Draft a QDRO or Similar Order – A QDRO or a similar court-approved order must outline how the funds will be divided between the spouses.
- Submit the Order to the HSA Administrator – The plan administrator will review the order to ensure it complies with both the law and the plan’s policies.
- Transfer the Funds – Once approved, the receiving spouse may need to establish their own HSA to receive the funds, ensuring tax-free treatment.
- Ensure Compliance with IRS Rules – The transfer must be executed correctly to avoid taxes and penalties. You may want to consult with an accountant and/or other financial professional. In addition, the parties will need to hire a separate attorney experienced in QDROs to facilitate the Order.
If for any reason it does not make sense to utilize a QDRO for the HSA division, you can consult with your attorney to see if you can offset the division of such with another marital asset, (e.g., one spouse keeps the HSA while the other receives an asset of equal value). Alternatively, you can also consider a direct distribution followed by reimbursement through a property settlement agreement.
Dividing an HSA during a divorce requires careful planning and adherence to legal and tax guidelines. Whether using a QDRO or another method, consulting with an experienced family law attorney can help ensure a fair and tax-efficient outcome. If you have questions about dividing assets in your divorce, including HSAs, contact Wolf & Shore Law Group for guidance tailored to your situation. You can contact us at 203.745.3151 or info@wolfandshorelaw.com to schedule a confidential consultation.