What Happens to HSA if You Die?

October 27, 2022

Many people today use a Health Savings Account (HSA) to help them pay for out-of-pocket medical costs. With more and more health insurance plans having high-deductibles, the popularity of HSAs is on the rise as a cost-effective way to save for expected medical costs.

That's because HSA's provide people with the opportunity to set aside pre-tax money for these expected medical expenses. The funds can be deducted directly from your paycheck, just like 401(k) contributions, which then lowers your taxable income.

All in all, it's a win-win situation for many people who expect to have to pay a significant sum toward medical costs in any given year.

But, what happens to an HSA when the account holder passes away? Below, we'll discuss what an HSA is, what happens when the account holder dies and how it operates similarly to other financial accounts.

What is an HSA?

An HSA is a financial tool the federal government has made available to help people save for the high cost of medical care. Account holders can contribute pre-tax dollars to these accounts, which provides them savings in the total amount that they spend on health care each year.

The federal government sets limits on how much one can contribute to an HSA on an annual basis. In 2022, this amount is $3,650 for individuals and $7,300 for families. The money put into HSAs can be used to pay for the costs of copayments, deductibles and coinsurance, as well as some other potential expenses. They typically cannot be used to pay for health insurance premiums, though.

To qualify for an HSA, the account holder must have a high deductible health plan. These plans are becoming more popular today as a way for insurance companies to offset the rising costs of medical care. With these plans, individuals are generally responsible for more out-of-pocket costs than they were in the past.

What Happens to an HSA if You Die?

An HSA acts like many other financial accounts in regard to what happens when its account holder dies. Like most other financial accounts, your HSA will pass onto whoever you named as a beneficiary -- as long as you have set one. 

When you sign up for an HSA, you can set a single individual, multiple individuals or a trust to be its beneficiaries. If you don't set a beneficiary, it will automatically transfer to your estate, in most cases, which could cause potential issues.

Who Can Be Named a Beneficiary?

Again, like other financial accounts, there really are no limits to who you can name as your beneficiary. Most people will name their spouse, if they have one.

If you don't want to name your spouse as your beneficiary, you may need their written approval to do so, assuming they are still alive, of course. In this case, you could name your children, other relatives, friends or colleagues as your beneficiary.

You also could name either a revocable or irrevocable trust as the beneficiary of your HSA, which might be a good idea if you have multiple financial accounts you're dealing with in a will.

What are the Tax Implications?

When you pass away, there may be tax implications of passing on your HSA. When you die, the administrator of the plan will provide to your estate's executor a document regarding your plan. It will state the plan's fair market value on the day that you passed away, which will be used to determine any taxes that either your estate may owe or that your beneficiary may owe.

How beneficiaries are treated at this point depends on who is taking over your account.

Surviving Spouse

If you've named a surviving spouse as your beneficiary, then the HSA will remain as is and simply transfer over to them. As such, there aren't any tax implications. 

If your spouse is younger than 65, they can use whatever money is in the account on a tax-free basis for any qualified medical expenses they may have. If they decide to use the money for other purposes, they'd have to pay a penalty of 20% plus the income taxes on whatever amount is distributed.

If your spouse is older than 65, then they will have no restrictions on how they can use the money. These are the same rules for account holders when they are living. The one exception is that your surviving spouse is not required to have a high deductible health plan in order to qualify.

Other Designated Beneficiary

If your designated beneficiary is someone other than a surviving spouse, then the HSA will close at the time you die. The funds that are in the account will be distributed based on your instructions, and taxes will be assessed at that point.

Your beneficiaries are able to use this money on a tax-free basis to pay for their own qualified medical expenses in the 12 months following your death. Anything else will be treated as capital gains and taxed as such.

Trust

If you left your HSA to a trust, then the plan will also end on the day you died. Only this time, the beneficiaries of your estate may be able to make out better, tax wise, since they'll qualify for the estate-tax exemption. As such, many people choose this option if they're leaving an HSA to someone other than a surviving spouse.

No Designated Beneficiary

If you haven't set a beneficiary for your HSA, it will end the day you die. The fair market value of the plan is included in the final income tax return, and the proceeds from the account are then distributed to your estate.

The estate proceeds will then be distributed according to your will. If you don't have one, your estate will enter probate, based on your state's laws.

Set a Beneficiary for Your Estate

As you can see, there are many advantages to setting a beneficiary if you own an HSA. This is especially true if you have a surviving spouse or if you would like someone other than your spouse to enjoy the most advantageous tax sitaution. 

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