Can HSA Be Used for Funeral Expenses?

A Health Savings Account (HSA) is a tax-advantaged savings tool designed specifically for healthcare expenses. It allows individuals covered by high-deductible health plans to save and pay for eligible medical costs with pre-tax dollars. Funds within an HSA grow tax-free, and qualified withdrawals are also tax-free, providing a valuable resource for managing health-related financial needs.

Understanding Qualified Medical Expenses

Understanding what the Internal Revenue Service (IRS) considers a “qualified medical expense” is important. These are generally medical care costs, as outlined in IRS Publication 502. Examples of such expenses include payments for doctor visits, prescription medications, hospital stays, dental care, and vision services like eye exams and eyeglasses.

The IRS explicitly defines these expenses as amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for treatments affecting any part or function of the body. This definition encompasses a wide range of services and products intended to alleviate or prevent physical or mental defects or illnesses. Crucially, general funeral expenses, burial costs, and related memorial services do not fall under this IRS definition of qualified medical expenses.

HSA and Funeral Expense Eligibility

However, an important distinction exists regarding medical expenses incurred prior to an account holder’s death. Final hospital bills, hospice care services, and last-minute prescription medications received before passing are considered qualified medical expenses. These specific pre-death medical costs can legitimately be paid from the HSA. Such distributions would be tax-free, provided they cover services rendered to the account holder before their death.

HSA After Account Holder’s Passing

The disposition of an HSA upon the account holder’s death depends on the named beneficiary. If a beneficiary is not designated, the funds typically transfer according to the terms of the HSA’s custodial agreement, often to the deceased’s estate. It is advisable to designate a beneficiary for an HSA, similar to other financial accounts.

If the surviving spouse is the named beneficiary, the HSA can be transferred to them without tax implications. The spouse assumes ownership of the account, and it continues to operate as their own HSA. They can use the funds for their own qualified medical expenses, or for non-medical expenses after age 65, subject to income tax but without an additional penalty.

If a non-spousal beneficiary, such as a child or parent, is named, the HSA ceases to be an HSA as of the account holder’s death. The fair market value of the account assets at the date of death is included in the non-spousal beneficiary’s gross income for that year, making the distribution taxable. However, the non-spousal beneficiary may reduce the taxable amount by any qualified medical expenses incurred by the deceased account holder before death, provided these expenses are paid by the beneficiary within one year after the date of death. If the estate is the beneficiary, the fair market value is included in the decedent’s final income tax return.