Choosing an HSA Beneficiary

choosing HSA beneficiary

You know I love to tell jokes, so stay tuned for more of my (in)famous humor. In the meantime, let’s get serious for a minute. More people are enrolling in high-deductible health plans (HDHPs) coupled with Health Savings Accounts (HSAs), which provide a way to save on taxes and healthcare expenses. Some people don’t realize that HSA account holders continue to own their accounts for life, even if they switch employers or retire. So, choosing an HSA beneficiary now to receive any remaining funds after the account owner’s death can help ease worries during a stressful time for loved ones.

Why are HSAs so popular?

Health Savings Accounts are very popular for several reasons:

  1. They offer triple-tax advantages. Owners can make tax-free contributions and tax-free withdrawals for qualified expenses. They also earn tax-free interest and investment income.

  2. Year after year, HSA account balances roll over, meaning any unspent funds stay in the account. Unlike some other tax-advantaged benefits, HSAs don’t have a “use it or lose it” policy.|

  3. All funds in the account are the property of the account owner, regardless of whether they were contributed by the employee, the employer, or family members or earned through interest and investing.

Thanks to tax-free growth, investment options, and rollover provisions, HSAs can become significant investments. With that in mind, HSA owners need to include them in planning for what happens upon their deaths.

Choosing an HSA Beneficiary

HSA account holders must name a beneficiary for their account, preferably at the time it is opened. Just as with a 401(k), IRA, or other retirement account, the money may pass on to that person(s).

Beneficiaries can include a spouse, child(ren), or anyone else the owner designates. However, different rules apply based on the relationship.

Rules for a Spouse Beneficiary

Married HSA owners may name their spouse as their beneficiary. In that case, the spouse will take over the HSA in the owner’s name upon death and can use the balance for qualified healthcare expenses without being taxed, even if not simultaneously enrolled in an HDHP. If the spouse has an HDHP, they can also continue contributing to the newly acquired HSA.

Rules for a Child or Other Beneficiary

The rules differ when designating someone other than a spouse as a beneficiary. The beneficiary must claim the HSA funds on their taxes in the year of the account owner’s death.

A non-spouse beneficiary assumes full responsibility, and the entire account balance is taxable in one year, which could be a huge tax hit for the beneficiary. However, they can reduce the taxable amount by paying for any qualified medical expenses for the deceased account owner within one year of the death.

Rules for an Estate Beneficiary

HSA owners with an estate may also choose to name the estate as their HSA beneficiary. If the estate is the beneficiary, the total distribution is included on the deceased HSA owner’s final tax return.*

What if there is no named beneficiary?

The account becomes part of the estate.

Can HSA funds pay for a funeral?

HSA funds may not pay for funeral or burial expenses as they are not considered qualified healthcare expenses.

Choosing an HSA beneficiary will give your loved ones greater peace of mind and financial support upon your death.

 *For estate or tax planning advice, contact a professional tax consultant.