An HSA account is best used while we’re alive. They provide amazing benefits when it comes to paying for qualified healthcare expenses. And they’re a terrific asset to have in retirement because once the owner turns 65, the usual 20% penalty for non-qualified expenses goes away.
What Happens to an HSA Account When The Owner Dies?
You can then treat it like an IRA, and use the money in your HSA account to supplement your income in retirement.
You just pay income taxes on withdrawals.
There are no required minimum distributions to worry about: if you own an HSA in retirement, you can let your assets compound indefinitely, unmolested by taxes as long as they’re in your account.
What’s less well known is what happens to assets in HSAs when the owner dies.
That’s not much of a problem for the owner, obviously. But if you are the spouse of a deceased HSA owner, you are the named beneficiary on a deceased owner’s HSA, or you are the beneficiary of the deceased’s estate and stand to inherit the HSA assets, you need to understand the different rules that apply in each case.
This guide is for you if:
- You are the spouse to a deceased HSA owner
- You are a non-spousal HSA beneficiary
- You are inheriting an estate of a deceased HSA owner, even if there are no surviving named beneficiaries on the HSA.
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Inherited HSA Accounts – General Rules
Generally, if you’re the spouse of a deceased HSA owner, the HSA becomes yours.
That means you can use it like it was your own HSA account all along.
You can use it to pay for your own qualified medical expenses, tax-free and penalty free.
Once you turn 65, the penalties go away. But you can still use the HSA to pay for qualified medical expenses, and even qualified long-term care insurance premiums, tax-free.
You just pay income taxes on any amounts you withdraw for purposes other than to pay qualified medical expenses.
If you’re not the spouse, however, the rules are very different:
If you inherit an HSA, you can spend it how you want. But the HSA’s value at the owner’s death becomes your taxable income that year.
However, you can offset this tax liability by paying the deceased’s medical bills within a year of death.
You are not taxed on any inherited HSA money you use to pay the deceased medical bills, as long as you do it within 12 months.
Non-spouses must transfer the HSA assets to an IRA. From there, you must distribute the entire amount within ten years, in accordance with the SECURE Act of 2019.
| Beneficiary Type | Outcome for HSA | Tax Implications | Additional Notes |
|---|---|---|---|
Spouse | You can treat an inherited HSA as your own. | Funds used for qualified medical expenses remain tax-free. If you're 65 or older, withdrawals are penalty free. | The account continues to grow tax-deferred. Withdrawals used to pay qualified medical expenses are tax free. If you are covered by a high deductible health plan and not yet 65, you may make pre-tax contributions to the IRA, up to your annual limit. |
Non-Spouse | The account ceases to be an HSA upon the owner's death. HSA assets not used to pay the deceased's medical bills within 1 year are treated as taxable income. | Fair market value of the HSA is taxable income for the beneficiary in the year of the owner's death. Medical expenses of the deceased paid within a year after death can be deducted. | Significant tax implications are possible depending on account balance. |
| No Designated Beneficiary | Assets are included in the deceased's final income tax return. |
Learn more about qualified medical expenses
What to Do When the HSA Account Owner Dies
If you’re the beneficiary or executor of the state, you should stop any further automatic contributions to the HSA, and all other retirement accounts, from the deceased’s bank accounts or other assets.
You should also immediately contact an estate attorney to advise you on how to safeguard the deceased’s assets until they go through probate.
However, if the deceased has named beneficiaries on the HSA(s), annuities, IRAs, or any other retirement account, or on life insurance policies, these assets don’t go through probate. You should contact the financial institutions and inform them of the death, so that they can go about distributing the assets to the various named beneficiaries.
If there are no named beneficiaries, then the asset will go through probate, and be distributed according to the deceased’s last will and testament, or according to state intestate laws.
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Questions on HSA Accounts? Need Help?
If you have questions about using your HSA, or about adding or changing a named beneficiary, click here and make an appointment to speak with a Personal Benefits Manager.
Consultations are free, and you’re under no obligation.
It’s fast, and easy!
For Further Reading: How To Use Your HSA to Pay for OTC Medication | Unlock the Power of Your HSA – How To Pay for Chiropractic Treatment From Your Health Savings Account | How To Use Your HSA to Pay For Transportation Expenses
