What Happens to an HSA Upon Death?

When an individual passes away, the fate of their Health Savings Account (HSA) depends on certain factors. Here's what happens to an HSA upon death:

1. Beneficiary Designation:

• If the account holder designated a beneficiary for their HSA, the funds in the account will transfer directly to the named beneficiary upon the account holder's death.
• The beneficiary can use the HSA funds for qualified medical expenses tax-free.

2. Spouse as Beneficiary:

• If the spouse is named as the beneficiary, the HSA can be transferred to the spouse tax-free, and it will be treated as the spouse's HSA.
• The spouse can continue to use the funds for qualified medical expenses.

3. Non-Spouse Beneficiary:

• If a non-spouse is named as the beneficiary, the HSA will no longer be considered a tax-advantaged account.
• The fair market value of the HSA as of the date of death will be included in the deceased account holder's gross income for that tax year.

4. No Designated Beneficiary:

• If the account holder did not designate a beneficiary, the HSA becomes part of the deceased's estate.
• The funds in the HSA will be distributed according to the account holder's will or state laws governing intestate succession.

It's essential to review and update the beneficiary designation on your HSA regularly to ensure your funds go to the intended recipient.

Understanding what happens to your Health Savings Account (HSA) when you pass away is important. Let's break it down:

1. Beneficiary Designation:

• Designating a beneficiary for your HSA ensures that your hard-earned savings can be passed on smoothly. The funds will transfer directly to the named beneficiary without going through probate.
• Moreover, the beneficiary has the advantage of using the HSA funds for qualified medical expenses without tax implications.

2. Spouse as Beneficiary:

• If a spouse is designated as the beneficiary, they can inherit the HSA in a tax-advantaged manner, allowing them to treat it as their own.
• This means your partner can continue to use those funds for qualified medical expenses, providing peace of mind during a difficult time.

3. Non-Spouse Beneficiary:

• In the case where a non-spouse is named, it's critical to know that the HSA loses its tax-advantaged status upon your death.
• This means the fair market value of your HSA will need to be included in the income of the deceased for that year, potentially affecting the tax burden significantly.

4. No Designated Beneficiary:

• For those who haven't designated a beneficiary, know that your HSA will be treated as part of your estate.
• Funds will be allocated according to your will or, if no will exists, in accordance with state laws on inheritance.

Therefore, it’s beneficial to periodically review your HSA beneficiary designation to align with your current circumstances and ensure your assets are inherited as you wish.