What happens to hsa account when you die

"Do you know what happens to your HSA after you die? Health savings accounts, called HSAs for short, function differently than most other kinds of accounts."

An HSA, or Health Savings Account, can be an excellent way to save for medical expenses. For wage earners with high-deductible HSA-eligible health insurance plans, the IRS allows generous contributions on a pre-tax basis to an HSA ($3,600 per year for individuals, $7,200 per year for a family plan as of 2021), according to the article “HSAs and Estate Planning” from The Street. The money can be withdrawn, including both principal and earnings, with no taxes, as long as the withdrawals are used for qualified medical expenses. Here’s a look at what happens to an HSA when the owner dies.

Seems like a no brainer, doesn’t it? This unique account allows for triple-tax savings. However, when Health Savings Accounts become large, savvy planning is needed to understand how they work in estate planning and taxes.

The inherited HSA becomes the surviving spouse’s HSA, if the spouse had been designated as the beneficiary on the HSA. The money remains in the HSA and the spouse’s name is added to the account. They may make tax-free distributions from the HSA to pay for their own qualified medical expenses, as if they were the original owner. The HSA is not included in the estate, since it has become the property of the surviving spouse.

What if a non-spouse is the designated beneficiary? Upon the death of the original owner, the HSA is no longer considered an HSA for tax purposes. An immediate and taxable distribution of the entire amount goes to the non-spouse beneficiary. The beneficiary must include the HSA balance in their taxable income in the year of the original owner’s death.

The normal 20% penalty applying to distributions for non-qualified medical expenses doesn’t apply.  The beneficiary pays income taxes at their marginal tax rate on the full amount of the HSA balance.  However, at least there are no penalties.

However, any portion of an inherited HSA balance used to pay for outstanding medical expenses of the account owner within one year of the date of death (DOD) is not taxable to the non-spouse beneficiary. In this case, the HSA is also not included in the estate, since it is fully taxed to the non-spouse beneficiary on their own individual tax return.

If the Health Savings Account owner designates their estate as the beneficiary when they die, the account balance is included in the owner’s gross income for the year of their death. The HSA is still not included in the estate and is treated as income for the last year of their life, when it is reported as income on the final tax return.

A charity may be listed as a beneficiary for a has. Any charity will receive the full amount of the HSA with no taxes or penalties.

For most people, it’s best to use the HSA as you need it. Once you reach age 65, you are no longer subject to the 20% penalty for withdrawals not spent on medical expenses. If you have a sizable HSA, talk with your estate planning attorney on how to efficiently use it, while living and for other beneficiaries after you have died. If you would like to learn more about what happens to accounts such as an HSA when the owner dies, please visit our previous posts.

Reference: The Street (Dec. 9, 2021) “HSAs and Estate Planning”

Photo by August de Richelieu from Pexels

Information in our blogs is very general in nature and should not be acted upon without first consulting with an attorney. Please feel free to contact Texas Trust Law to schedule a complimentary consultation.

As enrollment in high deductible health plans grows, so does the number of people with a Health Savings Account (HSA). HSAs are great for saving money on taxes and healthcare expenses. Plus, the HSA is owned by the account holder and stays with that person for the life of the account, even if they switch companies or retire. Whether you have only recently signed up for an HSA or have had one for years, you need to know what happens to your HSA when you die. If you name an HSA beneficiary now, there will be one less thing to worry about.

What happens to your HSA when you die

Health Savings Accounts are very popular and with good reason. First, the triple tax advantage of tax-free contributions, tax-free withdrawals for qualified expenses, and tax-free interest and investment income makes them very valuable.

Second, year after year, your account balance rolls over, meaning that any money that wasn’t spent stays in the account. HSAs don’t have a “use it or lose it” policy, like with some Flexible Spending Accounts.

With tax-free growth, investment options, and rollover, your HSA can grow to a pretty sizeable balance. With that in mind, you need to prepare for when the Grim Reaper comes calling.

Naming an HSA Beneficiary

As an HSA account holder, you need to name a beneficiary for your Health Savings Account. Just like a 401(k), IRA, or other retirement account, the money can be passed on.

Your beneficiary does not have to be your spouse or child. You can choose Aunt Sally, Cousin Ed, or anyone else you want to have the money. However, the rules apply differently for different types of relationships.

Naming Your Spouse as HSA Beneficiary

If you’re married and name your spouse as beneficiary, he or she will take over the HSA in their name and it will become their own. They can use account balance for qualified healthcare expenses without being taxed, even if they are not enrolled in a HDHP. If they do have an HDHP, then the spouse can also contribute to the newly acquired HSA.

Naming a Child or Other Person as Beneficiary

If you decide to designate someone other than a spouse as beneficiary, the rules are much different. The person will have to claim the HSA funds on their taxes in the year of your death. The non-spouse beneficiary assumes full responsibility and the entire account balance is taxable in one year, which could be a huge tax hit for them.

There is one caveat: the non-spouse beneficiary can reduce the taxable amount by paying for any qualified medical expenses for the deceased (you) within one year of your death.

Naming Your Estate as Beneficiary

If you have an estate, you may also choose to name your estate as your HSA beneficiary. If the estate is the beneficiary, then the total distribution is in included on the deceased HSA owner’s (your) final tax return.*

What if I Don’t Name a Beneficiary?

Your account will be included in your estate.

Can I Pay For My Funeral With My HSA?

You may be wondering if you can use your HSA to pay for your funeral or burial  expenses. The answer is no, because funeral and burial expenses are not  considered qualified healthcare expenses.

Be sure to name an HSA beneficiary. You and your loved ones will have better peace of mind when your time comes.