Navigating this big life change and your HSA
A divorce can be one of the more difficult life changes to navigate, given the process of untangling assets and separating finances. It's a process that can often be long and complicated.
Even though an HSA is an individual account and cannot be jointly shared with spouses, account balances are often considered at the time of a divorce. Depending on the details of a court judgment, one person's HSA funds may be divided between the spouses or given in part or full to the former spouse.
Here are some things to know when navigating a divorce regarding your HSA account.
Divorce as a qualifying event
Divorce is a qualifying event to make plan changes. After a divorce, you may wish to switch your health care coverage and your HSA from an individual plan to a family plan, or vice versa, depending on the coverage you will need in your new situation.
If you are going through a divorce, you may be eligible to alter your HSA coverage at any point during the year, rather than waiting until open enrollment.
Determining your new HSA annual limit
When making an HSA plan change because of a divorce, consider the two methods the IRS uses to determine your new HSA annual contribution limit.
Method #1: If an employee switches from an individual plan to a family plan before Dec. 1 of the tax year, the IRS uses the 13-month or "Last Month" rule. Under the "Last Month" rule, you are considered to be an eligible individual for the entire year if you are an eligible individual on the first day of the last month of your tax year.
Method #2: For a change from a family plan to an individual plan, the IRS uses proration, which calculates which specific months an employee had a family plan versus an individual one.
Reimbursement of eligible expenses post-divorce
Once a divorce is finalized, you cannot reimburse eligible medical expenses for your former spouse tax-free. This is true even if a divorce decree allows an ex-spouse to stay on an employee's health care plan for a certain amount of time.
However, if you have children with your ex-spouse, the use of your family HSA plan is unaffected by divorce, even if only one of you now claims the child as a tax dependent. Either of you can generally use your contributions to pay for a child's medical costs if the child is a tax dependent.
Tax Considerations when dealing with divorce
The movement of all or part of your HSA to a spouse or former spouse as required by a divorce decree is not a taxable transfer. A former spouse may avoid paying taxes on the account if the funds are transferred and held by an HSA. If the money is put into another type of account, the money will be taxable by the IRS, so consider transferring funds to an HSA in your name.