QUESTION: Our company is adding a high-deductible health plan (HDHP) option next year, so that employees who choose the HDHP and otherwise meet the HSA eligibility requirements can establish and contribute to HSAs. What will happen to the funds in an HSA after an account holder dies?
ANSWER: Upon the death of an HSA account holder, any amounts remaining in the HSA transfer to the beneficiary named in the HSA beneficiary designation form. (If a beneficiary is not named, the funds transfer according to the terms of the HSA trust or custodial account agreement.) The HSA is then treated in one of two ways, depending upon whether the beneficiary is the account holder’s surviving spouse or a person other than the surviving spouse.
Surviving Spouse. If the beneficiary is the deceased account holder’s surviving spouse, the spouse becomes the HSA account holder, and the transfer of ownership is not taxable. Distributions from the HSA will continue to be subject to income tax only to the extent they were not used for qualified medical expenses. Like any other HSA account holder, the surviving spouse may designate a beneficiary to receive any amounts remaining in the HSA upon the spouse’s own death, roll over (or directly transfer) some or all of the HSA’s account balance into another HSA (or an Archer MSA), and add to the HSA through rollovers, transfers, and contributions if applicable requirements are satisfied.
Other Person. If the beneficiary is someone other than the deceased account holder’s surviving spouse, the HSA ceases to be an HSA, and an amount equal to the fair market value of the account assets as of the date of the account holder’s death is includible in the beneficiary’s gross income (or, if the beneficiary is the deceased account holder’s estate, this amount is includible in the decedent’s gross income for the year in which the death occurred). A non-spouse beneficiary (other than the deceased account holder’s estate) may reduce the includible amount by the amount of any payments made from the HSA for qualified medical expenses incurred by the deceased account holder before death, but only if the payments are made within one year after death.
For more information, see EBIA’s Consumer-Driven Health Care manual at Section XV.G (“Treatment of HSAs Upon Divorce or Death”).
Contributing Editors: EBIA Staff.