As enrollment in high deductible health plans grows, so does the number of people with a Health Savings Account (HSA). HSAs are great for saving money on taxes and healthcare expenses. Plus, the HSA is owned by the account holder and stays with that person for the life of the account, even if they switch companies or retire. Whether you have only recently signed up for an HSA or have had one for years, you need to know what happens to your HSA when you die. If you name an HSA beneficiary now, there will be one less thing to worry about.
Health Savings Accounts are very popular and with good reason. First, the triple tax advantage of tax-free contributions, tax-free withdrawals for qualified expenses, and tax-free interest and investment income makes them very valuable.
Second, year after year, your account balance rolls over, meaning that any money that wasn’t spent stays in the account. HSAs don’t have a “use it or lose it” policy, like with some Flexible Spending Accounts.
With tax-free growth, investment options, and rollover, your HSA can grow to a pretty sizeable balance. With that in mind, you need to prepare for when the Grim Reaper comes calling.
As an HSA account holder, you need to name a beneficiary for your Health Savings Account. Just like a 401(k), IRA, or other retirement account, the money can be passed on.
Your beneficiary does not have to be your spouse or child. You can choose Aunt Sally, Cousin Ed, or anyone else you want to have the money. However, the rules apply differently for different types of relationships.
If you’re married and name your spouse as beneficiary, he or she will take over the HSA in their name and it will become their own. They can use account balance for qualified healthcare expenses without being taxed, even if they are not enrolled in a HDHP. If they do have an HDHP, then the spouse can also contribute to the newly acquired HSA.
If you decide to designate someone other than a spouse as beneficiary, the rules are much different. The person will have to claim the HSA funds on their taxes in the year of your death. The non-spouse beneficiary assumes full responsibility and the entire account balance is taxable in one year, which could be a huge tax hit for them.
There is one caveat: the non-spouse beneficiary can reduce the taxable amount by paying for any qualified medical expenses for the deceased (you) within one year of your death.
If you have an estate, you may also choose to name your estate as your HSA beneficiary. If the estate is the beneficiary, then the total distribution is in included on the deceased HSA owner’s (your) final tax return.*
Your account will be included in your estate.
You may be wondering if you can use your HSA to pay for your funeral or burial expenses. The answer is no, because funeral and burial expenses are not considered qualified healthcare expenses.
Be sure to name an HSA beneficiary. You and your loved ones will have better peace of mind when your time comes.
*For estate or tax planning advice, contact a professional tax consultant.