The value of Health Savings Accounts (HSAs) can be easily overlooked by practitioners and clients in a divorce.
This could be a costly mistake, as HSAs can be assets with significant value, and the contributions will affect cash flow.
This post explains what a Health Savings Account is. Then it discusses both the expenditure and asset aspects of Health Savings Accounts.
What is a Health Savings Account?
A Health Savings Account is a tax advantaged savings account dedicated specifically to health care expenditures.
The owner can put money into the account on a pre-tax basis, then take the money out tax-free to spend on deductibles, copayments, coinsurance, and qualified medical expenses.
Qualified medical expenses include prescription medications, dental care, many out-of-pocket medical costs, and even over-the-counter medications.
The effect of the HSA is to make payments for some medical expenses tax-deductible.
Tax law limits this benefit in a couple of ways.
- You can only set up an HSA in conjunction with a high-deductible health plan.
- There are limits on the amount you can put into your HSA each year.
Also, if an individual contributes an amount beyond the IRS contribution maximums, or spends the money on non-qualified expenses, that can result in hefty penalties or taxation.
Why Encourage High-Deductible Health Plans?
A high-deductible health plan is a health plan that has a higher deductible (out-of-pocket amount) that the insured party must pay before insurance kicks in. For 2023, the deductible must be from $1,500 – $7,500 for an individual and $3,000 – $15,000 for a family.
In exchange for requiring the higher deductible, health insurers offer lower premiums. With such a plan, both the employer and employee save money on the premiums.
But the employee does have a higher deductible.
The Health Savings Account allows the employee to use tax-deductible funds to cover that deductible (and other qualifying expenses that are not covered by the health care insurance).
The policy goal, here, is to encourage high-deductible health plans.
Why is that a policy goal?
Because the structure of a high-deductible health plan is thought to encourage employees to challenge potential medical expenditures, because the higher deductible means that employees are paying for those initial thousands of dollars of expenses out-of-pocket.
This cost-consciousness may lead people to decline treatments that will have marginal benefit, or to look for less-expensive but equivalent or almost-as-good alternatives.
Because doctors have their patients’ interests at heart, some doctors may also begin thinking that way. The result overall would be more effective health care spending.
Health Savings Accounts Tax Advantages
Health Savings Accounts are valuable assets that offer many tax benefits:
- Contributions to HSAs are tax deductible even if the client does not itemize deductions on their Schedule A (Form 1040).
- Contributions to an HSA made by the employer may also be excluded from the employee’s gross income.
- HSAs are generally portable; clients can keep their accounts even if they change employers or health insurance plans.
- All contributions and earnings grow tax free.
- Many HSA providers allow money to be invested in stocks, bonds, funds, or high yield savings.
- Distributions or withdrawals remain tax free so long as they are used to pay for qualified medical expenses.
- At age 65, account holders may disburse funds, tax free, for medical expenses, including some Medicare premiums. If the funds are used for any other purpose, though, they are subject to income taxation similar to a traditional IRA.
How Can Health Savings Become Assets?
In 2023, the amount placed into the HSA can be $3,850 per individual and $7,750 per family.
Participants 55 years and older may contribute an additional $1,000 as catch-up contributions.
Healthy people may put more money into their HSA than they spend on medical expenses.
If your client has put money into their HSA year after year for 5, or 10, or 20 years, the HSA account can accumulate significant value.
If your client has put money into their HSA year after year for 5, or 10, or 20 years, the HSA account can actually accumulate significant value.
Divorce practitioners often forget even to ask about the HSA, but there could be a significant asset there, that they should not overlook.
How Should I Handle HSAs in Family Law Software?
There are two aspects of Health Savings Accounts:
- The monthly (or annual) contribution; and
- The accumulated and growing asset value.
We will discuss each in turn.
With respect to the monthly contribution, go to Income & Expenses, and find the line for HSA contributions. Depending on the state, this will be in the payroll deduction, insurance, or health care expense section. Enter the contribution there.
This will mark it as a pre-tax deduction for tax purposes, but not as a direct deduction for child support purposes.
The contribution may have an indirect impact on child support, though, if your state’s child support contribution considers federal or state taxes as a deduction. That’s because the HSA contribution will affect the tax numbers, and the tax numbers will affect child support.
If the party’s HSA account has a zero balance because all the contributions are spent each year (on average), then you’re done.
But what about people who have, or are building, value in their HSA accounts by making contributions and not spending them?
You can handle that in Family Law Software, as follows:
- Where there is an HSA account that has value today, create an IRA/401(k) asset and enter that value as the value of the IRA/401(k) account.
- If you expect that future contributions will increase the body of the asset, then enter as account contributions just the amount of annual contributions that will not be spent. Check the box indicating the contribution is non-deductible or nonqualified.
- If you expect that growth from investment will enable the HSA balance to grow, then enter a growth rate for the IRA/401(k) asset.
The following example will illustrate:
Suppose there is an HSA account with $10,000 of value today. And suppose that each year, the party contributes $5,000 to the HSA account, and you expect that each year, $3,000 will be spent on qualified health expenses.
Here’s how you enter this in Family Law Software:
- HSA Expense. In the Income & Expense section, find the HSA line. Enter $5,000 (or $417 monthly) on that line, for the current contribution to the account.
- HSA Asset. Create an IRA/401(k) asset with a value of $10,000.
- HSA Income. Enter $2,000 as annual nondeductible contribution. This is the $5,000 of annual contribution minus the $3,000 that will be spent on medical expenses. Enter it as non-deductible because the HSA Expense line triggers the full $5,000 tax deduction, and if we were to mark the IRA/401k contribution as deductible, that would be double-counting.
- HSA Growth. If the HSA is invested in a stock fund or similar assets that you expect to appreciate, enter an anticipated rate of growth of those assets.
In the software, note that there is no direct pipeline from the HSA contribution you enter in the health insurance section to the HSA account you enter in the IRA/401(k) section. But with the combined entries noted above, you can accurately reflect all aspects: the current-year deduction, any current asset value, the future-year growth, and all tax aspects.
Conclusion
Health Savings Accounts can be valuable assets that should not be ignored.
Family Law Software enables you to enter the contributions, value, and growth to accurately reflect the current-year tax deduction, future years’ growth, and any impact on child support and taxes.
Helpful Resources:
FLS Power Webinar: Property Division: https://www.youtube.com/watch?v=VEYp-eRvY68
IRS Publication 969 (2022), Health Savings Accounts and Other Tax-Favored Health Plans: https://www.irs.gov/publications/p969.pdf
IRS Publication 502 (2022), Medical and Dental Expenses: https://www.irs.gov/pub/irs-pdf/p502.pdf