What happens to an hsa 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 The money can be withdrawn, including both principal and earnings, with no taxes, as long as the withdrawals are used for qualified medical expenses.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

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Bank of America, N.A. makes available The HSA for Life® Health Savings Account as a custodian only. The HSA for Life is intended to qualify as a Health Savings Account (HSA) as set forth in Internal Revenue Code section 223. However, the account beneficiary establishing the HSA is solely responsible for ensuring satisfaction of eligibility requirements set forth in IRC sec 223. If an individual/employee establishes a HSA and s/he is not otherwise eligible, s/he will be subject to adverse tax consequences. In addition, an employer making contributions to the HSA of an ineligible individual may also be subject to tax consequences. We recommend that applicants and employers contact qualified tax or legal counsel before establishing a HSA.

Bank of America does not sponsor or maintain the Flexible Spending Accounts (FSA) / Health Reimbursement Accounts (HRA) that you establish. The programs are sponsored and maintained solely by the employer offering the plan, or by an individual establishing an independent plan. Bank of America acts solely as claims administrator performing administrative tasks pursuant to an agreement with, and at the direction of, the sponsoring employer or individual under an independent plan. The sponsoring employer or individual under an independent plan is solely responsible for ensuring such arrangements comply with all applicable laws.

The planning tools and information calculators are illustrative only, and accuracy is not guaranteed. They are intended to provide a comparative tool for various consumer health care options and potential costs and savings of those options. Bank of America and its affiliates are not tax or legal advisors. The calculators are not intended to offer any tax, legal or financial advice and do not assure the availability of or your eligibility for any specific product offered by Bank of America or its affiliates. Please consult with qualified professionals to discuss your situation. This site may contain links to third-party content, which may be articles, videos, or calculators, regarding health plans only as a convenience. Some articles, videos and calculators may have been written and produced by third parties not affiliated with Bank of America or any of its affiliates.

Neither Bank of America nor any of its affiliates or employees provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions. This material should be regarded as general information on health care considerations and is not intended to provide specific health care advice.

If you have questions regarding your particular health care situation, please contact your health care, legal or tax advisor.

Please consult with your own attorney or tax advisor to understand the tax and legal consequences of establishing and maintaining a HSA, FSA, Dependent Care FSA, and/or HRA plan.

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Bank of America, N.A., Member FDIC. Mutual Fund investment offerings for the Bank of America HSA are made available by Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”), a registered broker-dealer, registered investment adviser, Member SIPC, and a wholly owned subsidiary of Bank of America Corporation (“BofA Corp.”). Investments in mutual funds are held in an omnibus account at MLPF&S in the name of Bank of America, N.A., for the benefit of all HSA account owners. Recommendations as to HSA investment menu options are provided to Bank of America, N.A. by the Chief Investment Office (“CIO”), Global Wealth & Investment Management (“GWIM”), a division of BofA Corp. The CIO, which provides investment strategies, due diligence, portfolio construction guidance and wealth management solutions for GWIM clients, is part of the Investment Solutions Group (ISG) of GWIM.

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