What Happens to Your HSA When You Die?

A Health Savings Account (HSA) is a tax-advantaged savings account for healthcare expenses. Typically paired with a high-deductible health plan (HDHP), HSAs allow individuals to contribute pre-tax income, grow funds tax-free, and withdraw them tax-free for qualified medical expenditures. Unlike other flexible spending arrangements, unused funds roll over year to year. Upon the death of an account holder, the disposition of HSA funds is governed by specific rules, which vary significantly based on the designated beneficiary.

Inheriting an HSA as a Spouse

When a spouse is designated as the beneficiary of a Health Savings Account, the transfer of ownership is generally the most straightforward and tax-advantageous. The HSA automatically becomes the surviving spouse’s own HSA as of the original account holder’s date of death. The account retains its tax-advantaged status, and the transfer itself is not considered a taxable event.

The surviving spouse can continue to use the funds for qualified medical expenses, receiving tax-free distributions, just as the original account holder would have. This allows the spouse to benefit from the triple tax advantage of the HSA: tax-deductible contributions, tax-free growth, and tax-free withdrawals for eligible expenses. If the surviving spouse already maintains an HSA, they can typically roll the inherited funds into their existing account, consolidating their healthcare savings.

If the surviving spouse does not have an existing HSA, they can establish a new one to receive the inherited assets. They can also continue to make contributions to the HSA, provided they meet the eligibility requirements for HSA contributions, such as being covered by a high-deductible health plan. This favorable treatment underscores the Internal Revenue Service’s recognition of the spousal relationship in preserving the intended purpose of the HSA for healthcare savings.

Inheriting an HSA as a Non-Spouse

The inheritance of an HSA by a non-spouse beneficiary, such as a child or parent, operates under different tax rules compared to spousal inheritance. In this scenario, the account ceases to be treated as an HSA as of the date of the original account holder’s death. The fair market value of the account on the date of death is generally included in the non-spouse beneficiary’s gross income for federal income tax purposes in the year the account holder died.

The inherited funds become immediately taxable to the non-spouse beneficiary, and they cannot treat the account as an HSA or roll it over into their own HSA. The taxable amount may potentially increase the beneficiary’s overall income, which could push them into a higher tax bracket. While the distribution is taxable, it is typically not subject to the 20% penalty tax that applies to non-qualified distributions during the account holder’s lifetime, as death is an exception.

There is a limited exception that allows for a reduction in the taxable amount. If the inherited funds are used to pay for the deceased account holder’s qualified medical expenses incurred prior to death, and these expenses are paid within one year after the date of death, that portion of the distribution may be excluded from the beneficiary’s gross income. Any remaining funds beyond these eligible medical expenses remain fully taxable.

When the Estate Inherits the HSA

If no specific beneficiary was designated for the HSA, or if the deceased account holder’s estate was explicitly named, the HSA assets become part of the deceased’s probate estate. The fair market value of the HSA on the date of death is included as taxable income on the deceased individual’s final income tax return. The tax liability for the HSA funds falls upon the estate itself.

The estate can use the funds to cover various final expenses, including outstanding medical bills. Once the estate settles its obligations, any remaining funds are distributed to legal heirs according to the deceased’s will or state intestacy laws. The tax on the HSA funds is addressed at the estate level, meaning subsequent distributions to heirs are not subject to additional income tax.

This probate process can introduce complexities and extend the timeline for fund distribution. It also removes the direct tax advantages a spousal beneficiary would receive. Designating a direct beneficiary is recommended to streamline the transfer process and optimize tax outcomes.

Claiming Inherited HSA Funds

Claiming inherited HSA funds involves practical steps and documentation. First, contact the Health Savings Account custodian or administrator as soon as possible after the account holder’s death. This notification stops automatic contributions or distributions and initiates the claim process.

HSA custodians require specific documents to process a death claim. These include a certified copy of the deceased account holder’s death certificate, their HSA account number, and the beneficiary’s (or executor’s) personal identification, such as a Social Security number.

For named beneficiaries, proof of beneficiary designation, like the completed form on file, is required. If the estate is the beneficiary, probate documents such as Letters Testamentary or Letters of Administration will be needed to prove legal authority. The custodian will provide claim forms for submission with supporting documentation. After submission, processing time varies, but custodians typically disburse funds via check or direct deposit once approved. Beneficiaries or the estate should anticipate receiving tax forms, such as Form 1099-SA, and should consult a tax professional regarding reporting obligations.