What Happens to a Health Savings Account in an Illinois Gray Divorce?

 Posted on July 27, 2026 in Divorce Over 50

The marital share of a Health Savings Account (HSA) may be divided when you and your spouse divorce in 2026. Unlike a joint bank account, an HSA has only one named owner, and federal tax law sets out a specific process for transferring it to a former spouse without triggering a tax penalty. A DuPage County, IL gray divorce attorney can help you divide your HSA correctly while addressing other health insurance considerations and the rest of your marital assets.

Does a Health Savings Account Count as Marital Property in an Illinois Divorce?

Under the Illinois Marriage and Dissolution of Marriage Act, 750 ILCS 5/503, most property gained during a marriage counts as marital property. This includes an HSA that either spouse funded during the marriage. Contributions made before the marriage, or clearly traced to another nonmarital source, may be treated differently.

The Internal Revenue Service (IRS) does not get involved in how a state court classifies the account. That classification is left entirely to Illinois divorce law and the specific facts of your marriage.

Even though an HSA is individually owned, with only one spouse's name on the account, Illinois courts may still include it in the marital estate when it was funded with money earned during the marriage. This differs from a typical joint checking account, where both spouses are named owners from the start.

How Can an HSA Be Divided Without Triggering a Tax Penalty?

Simply withdrawing cash from an HSA and handing it to your spouse as part of the property division may create a taxable event and an additional 20 percent tax if the withdrawal is not used for qualified medical expenses. However, federal tax law offers a better option for divorcing couples. Under Internal Revenue Code Section 223(f)(7), transferring the interest in an HSA to a spouse or former spouse under a divorce decree is not treated as a taxable transfer.

This tax-free treatment applies when the transfer is made under a divorce decree or other qualifying divorce instrument. In many cases, the HSA custodian will require a trustee-to-trustee transfer, meaning the money moves directly from one HSA provider to the other without passing through either spouse. Once the transfer is complete, the receiving spouse owns the funds as their own HSA, with the same tax advantages.

A Flexible Spending Account (FSA) cannot be divided in the same way. Unlike an HSA, an FSA is enerally tied to an employer-sponsored benefit plan and cannot be transferred to a former spouse. 

For 2026, the IRS caps new HSA contributions at $4,400 for self-only coverage and $8,750 for family coverage. A transfer made under the divorce does not count toward the receiving spouse’s contribution limit.

What Happens to Your HSA Eligibility After an Illinois Divorce Is Finalized?

Medical expenses your former spouse incurs after the divorce generally will not qualify for tax-free payment from your HSA unless that person qualifies as your tax dependent. Otherwise, the withdrawal is taxable and may be subject to an additional 20 percent tax. The additional tax does not apply after you turn 65 or become disabled.

Each former spouse must separately meet the HSA eligibility rules to make new contributions. A change from family to self-only coverage may reduce the yearly limit, although the IRS’s last-month rule can affect the final calculation.

How Can You Protect Your HSA During a Gray Divorce?

A health savings account is easy to overlook next to larger retirement accounts, but it deserves the same careful handling. In a gray divorce, your HSA may play an important role in paying for healthcare costs during retirement. A few practical steps can help protect your interests as your case moves forward:

• Confirm how much of your HSA balance was contributed before the marriage, since those funds may not count as marital property.

• Work with your attorney to arrange a trustee-to-trustee transfer if the account is being split, so the transfer avoids unnecessary taxes and penalties.

• Update your HSA beneficiary designation once your divorce is finalized.

Taking care of these details before your settlement is finalized helps you avoid unnecessary taxes and disputes over the account later.

Schedule a Free Consultation with a Wheaton, IL Gray Divorce Attorney

The attorneys at Divorce Over 50 - Goostree Law Group help clients manage retirement accounts, asset division, and the many other concerns that come with divorcing later in life. Contact a DuPage County, IL divorce over 50 lawyer today to schedule your free consultation. Call 630-634-5050.