Medical care is very personal, and so are the expenses that go along with it. Many eligible individuals choose to manage their medical care costs with a health savings account (HSA).
According to the Consumer Financial Protection Bureau, there were approximately 36 million HSAs active in 2023, and these accounts collectively held more than $116 billion in assets, an increase of more than 500% since 2013. This spike is no surprise as medical costs continue to rise and as the benefits of HSAs are becoming better understood.
In spite of this rapid growth, it may come as a surprise to many HSA accountholders that HSA funds can be used more broadly than immediate personal healthcare needs—allowing the HSA to play an expanded role in a person’s overall financial plan. As HSA use has increased in the more than 20 years since they were established, we see a need to manage these accounts similar to how we manage other long-term financial tools. For example, in some circumstances, an HSA can cover medical costs for a spouse, child, and dependents, and in other situations, such as death or divorce, accountholders need to evaluate how the funds may be transferred.
Beyond a fundamental understanding of what an HSA can do, it’s also critical to be informed of their full scope and how they need to be managed over time.
More than mainstream medical needs
HSAs can be used to cover costs that many may not have thought to be eligible, such as acupuncture, contact lenses and supplies, crutches, smoking cessation programs, wheelchairs, dental treatments and more.
HSAs also cover a broader spectrum of medical needs unique to women than many realize. The IRS provides full guidance on what qualifies as an HSA-eligible expense, so review these resources to understand all of the options.
Covering care for medical dependents
An HSA can be used to pay for eligible expenses for a spouse, children or anyone listed as a dependent on the accountholder’s tax return, regardless of whether they have individual or family coverage through their health plan. Given this guidance, an HSA can be used to cover qualified medical expenses for aging parents—as long as they are listed as qualified medical dependents. If they have a non-relative listed as a qualified dependent on their tax return, they could use their HSA to pay for their qualified medical expenses as well.
HSA beneficiaries
What happens to the funds in an HSA after the accountholder passes away? This is a consideration to be mindful of at account opening and over time, as one or more beneficiaries may be designated.
In certain states, a spouse’s consent may be necessary if a person other than, or in addition to the spouse, is named a beneficiary or to change an existing beneficiary designation. HSA beneficiaries and inheritance can become a complex process, so accountholders should seek guidance from an attorney before making or changing a beneficiary designation.
Managing account changes after divorce
HSA funds can be transferred between partners during a divorce or separation as part of the divorce agreement. A court order may direct the transfer of funds from an existing HSA balance to a new HSA opened by the ex-spouse.
As long as the transfer is completed in accordance with the terms of the agreement and the IRS guidelines, it shouldn’t result in any tax consequences for either party. Note, however, once a divorce or separation is final, you cannot continue to use your HSA to pay for your ex-spouse’s medical expenses, unless they’re listed as a dependent on your tax return.
The bottom line
In addition to having triple tax benefits, portability and other advantages, HSAs can help manage medical costs beyond personal basics and help cover important bills for spouses, child and medical dependents. Be sure to research and consider working with a professional to help you understand the full spectrum of benefits and other considerations involved with HSAs.
All mention of taxes is made in reference to federal tax law. Neither UMB Bank n.a., nor its parent, subsidiaries, or affiliates are engaged in rendering tax or legal advice and this document is not intended as tax or legal advice.
SEE ALSO:
• How Younger Generations are Taking Advantage of HSAs
• Common HSA Mistakes (and Fixes) with ‘Mr. Retirement’ Jeremy Keil
• HSAs Have ‘Mixed Effects’ on Healthcare Service Usage
Brian Hutchin, CTP, is executive vice president and director of UMB Healthcare Services at UMB Bank in Kansas City, Mo. With more than 25 years of financial industry experience, he is responsible for the overall strategy and management of the Healthcare team, including sales, implementation and relationship management. Additionally, he serves as an executive team member for the Institutional Banking division, providing input on the strategic direction of the department and overall growth of the business.
