What Happens to My HSA When I Die?

 

Today's post covers issues related to beneficiaries for your HSA. What happens to my HSA when I die? You can name beneficiaries on your HSA and your beneficiaries will receive any funds in your HSA if you die. HSAs are payable on death accounts which means that we can pay the beneficiary without waiting for the estate to complete probate. What if my beneficiaries die before me? You can also name contingent beneficiaries that will get the money in the situation where your primary beneficiaries pre-decease you. Do I have to name a beneficiary? No. You do not have to name a beneficiary and if you die before naming a beneficiary, your HSA will go to your estate. Can I change my designation of beneficiary or add a beneficiary? Yes. You can change your designation at any time by completing a change of beneficiary form. You can also use this form to add beneficiaries if you did not do so when you opened your HSA. Can my beneficiaries continue to use the HSA as an HSA? The answer depends upon whether or not you name a spouse as your beneficiary. Spouse Beneficiaries. A spouse beneficiary can treat the HSA as his or her own. Basically, your HSA becomes your spouse's HSA after you die and your spouse can continue to use the HSA as an HSA. Your spouse will not owe taxes or penalties on the HSA provided your spouse uses the HSA for eligible medical expenses. Non-Spouse Beneficiaries. Non-spouse beneficiaries are not entitled to use the HSA and must take a full distribution in the year of death. Non-spouse beneficiaries will have to pay income taxes on the HSA amount they receive, but they will not have to pay the 20% penalty for non-eligible distributions from an HSA.  Is it better to name a spouse than a non-spouse for an HSA? Spouses get more favorable tax treatment than non-spouses as beneficiaries for HSAs, so from that perspective it makes more sense to name a spouse. Whomever you name; however, will get your HSA assets after you pass away. A non-spouse beneficiary will just have to pay taxes on the amount and will not be able to use it tax-free for eligible medical expenses as a spouse could. Can my beneficiary use my HSA to pay for my medical expenses incurred before death?  Yes, a beneficiary can use money in the HSA to pay for the deceased HSA owner's medical bills incurred prior to death provided the beneficiary does so within one year of the date of the HSA owner's death. The beneficiary would not have to include the amount used to pay for the deceased HSA owner's medical expenses in income.  Can I name my trust as my beneficiary? Yes; however, there are tax implications of naming a trust as a beneficiary so please seek tax advice before doing so. If your spouse is your ultimate beneficiary of the trust, your spouse may lose the ability to continue to use the HSA as an HSA because you named a trust as the beneficiary rather than your spouse directly (only spouse beneficiaries are allowed to treat the HSA as their own). In some circumstances for Individual Retirement Accounts; however, the IRS has allowed the ability to "look through" the trust at the ultimate beneficiary. This same ability may be available for HSA spouse beneficiaries.