What Happens to Your HSA When You Die? How to Designate a Beneficiary
Key takeaways:
A health savings account (HSA) allows you to invest money for future healthcare costs, and any unused funds will go to your beneficiary when you die.
If you die and are married, your HSA money typically transfers to your spouse. Non-spouse beneficiaries must withdraw all the funds and pay income tax on the money they receive.
If you don’t name a beneficiary, your HSA funds will go to your estate and be subject to taxes.
Table of contents
Health savings accounts (HSAs) come with special tax benefits that make saving money on future healthcare costs easier. However, if you don’t have a lot of qualified medical expenses, or die unexpectedly, you may not use all the money in your account.
That’s why choosing a beneficiary is important, as it determines what happens to your HSA when you die.
What is an HSA beneficiary?
An HSA beneficiary is the person or organization you choose to receive the funds in your HSA account after you die. Naming an HSA beneficiary is similar to naming a beneficiary for a life insurance policy.
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When you open an HSA, you’re the main account holder and can name one or more beneficiaries, such as:
Your spouse
Your children
Other family members
Your estate
A trust
Naming a beneficiary ensures that your HSA money goes to the person or entity you want.
HSA beneficiary rules
You generally choose your beneficiaries when you set up your HSA. This is usually done by filling out a form through your HSA provider. However, designating HSA beneficiaries comes with rules that depend on where you live and which HSA company you use. Here are some basic things to know:
Spouse's rights: If you name your spouse as your beneficiary, they inherit your HSA tax-free and can continue to use the account as their own HSA. Some HSA companies have policies that automatically designate your spouse as the beneficiary if you didn’t name one.
Non-spouse beneficiary: Your HSA closes if someone other than your spouse inherits the account. In this case, the beneficiary must withdraw all the money and pay income tax on the account's fair market value (FMV). FMV is simply the current value of your HSA at the time of inheritance.
Primary and backup beneficiaries: You can usually name two types of beneficiaries: a primary and a backup, also called a contingent. If your primary beneficiary can't get the money, perhaps because they’ve passed away or can’t be located, the contingent may receive it.
Multiple beneficiaries: You can name more than one beneficiary and specify what percentage of the HSA funds each will inherit. The total shares must add up to 100%.
Whom should you designate as your HSA beneficiary?
Your choice of HSA beneficiary can significantly impact what happens to your HSA after you die. Here's a look at whom you can designate as an HSA beneficiary and how that choice affects your HSA after your death:
Having an HSA means dealing with tax forms from your HSA provider. Here are the tax forms you should know about and what they mean.
Most health insurance premiums can't be paid with HSA funds. But there are some specific situations where you can use your HSA funds for premiums.
Emergency, dental, and vision care are just a few expenses you can cover with your HSA funds. Here’s what else qualifies as an HSA-eligible expense.
Spouse
When you name your spouse as the account beneficiary, they become the account owner after you die. Typically, you need a high-deductible health plan to own an HSA. However, that rule doesn’t apply if your spouse inherits your HSA. They can enjoy the same account perks as you did, even without having a high-deductible health plan.
But your spouse will be subject to other HSA account restrictions. For example, they’ll face a tax penalty if they withdraw funds from the account to pay for nonqualified medical expenses. The penalty is 20% of the withdrawal amount if they are younger than age 65. There is no penalty if they are 65 or older.
Once your spouse turns 65, they can use the account funds however they want. The only catch is that they will have to pay income tax on the amount they withdraw for nonqualified expenses, such as vacations or home renovations.
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Child, family, or friends
Naming your child, friend, relatives, or an organization as an HSA beneficiary is an option. However, the account will not transfer to the beneficiary in the same way that it does with a spouse.
If you name a non-spouse beneficiary, the account closes on the date of your death and is no longer considered an HSA. The funds are then given to the beneficiary, but they will pay taxes on the amount as income received in the year of your death.
This added income could push your beneficiary into a higher tax bracket. Think about these tax effects when choosing someone other than your spouse as a beneficiary, as it could leave them with an unexpected tax bill. The upside is, unlike with regular HSA withdrawals, a non-spouse beneficiary won't face the usual 20% penalty for using the money on non-medical expenses. Also, a non-spouse beneficiary (other than the estate) can lower their tax bill if they use the HSA funds to pay for your unpaid medical bills after you die. These bills must be paid within one year of your death.
After your death, your beneficiary will receive a Form 5498-SA from the bank or company managing your HSA. This form shows both the contributions made to the HSA and its value at the time of your passing. The bank sends this same information to the IRS. Your beneficiary will use this form when reporting the inherited HSA money on their taxes.
Estate
Naming your estate as your HSA beneficiary can help avoid probate. Probate is the legal process of sorting out your assets after you die. By naming your estate, you prevent the courts from deciding who gets your HSA money. However, this choice has its downsides, too.
When your estate is the beneficiary, it might take longer for your family to get the HSA funds. Also, the HSA money will be part of your final tax return. This could increase the taxes owed by your estate.
Because this decision can be complicated, it's a good idea to talk to a tax expert or financial adviser to understand what's best for your situation.
Trust
You can also name a trust as your HSA beneficiary. A trust is a legal arrangement where someone (the trustee) manages your assets for the beneficiaries. There are revocable trusts, which you can change during your lifetime, and irrevocable trusts, which generally can't be changed once they’re set up.
When you name a trust as your HSA beneficiary, the funds go to the trust after you die. The trustee then manages and distributes the money based on your instructions.
Setting up a trust can be complicated and often requires help from an attorney. Plus, it’s not the right choice for everyone. Talk to an expert to see if naming a trust as your HSA beneficiary makes sense for your situation.
How to name a beneficiary
To name a beneficiary for your HSA, follow these general steps:
Contact your HSA provider to request a beneficiary designation form.
Decide whom you want to name as your beneficiary.
Consider naming a primary and contingent beneficiary.
Fill out the form with your chosen beneficiary’s information.
Sign and date the form, following any specific instructions.
Submit the form to your HSA provider.
Keep a copy for your records.
Confirm that the beneficiary designation is updated on your account.
Note that beneficiary designation is not a permanent decision. You can change the beneficiary any time you want. However, the following nine community-property states require the consent of your spouse before changing the beneficiary:
Arizona
California
Idaho
Louisiana
Nevada
New Mexico
Texas
Washington
Wisconsin
It's important to keep your beneficiary choices up to date, especially if your family circumstances change. These include major life events, such as getting married or divorced, or having kids.
What happens to your HSA if you die without naming a beneficiary?
If you don't name a beneficiary for your HSA, the funds will generally go to your estate and be included in your final tax return. But if you're married, your HSA money may automatically go to your spouse, depending on the laws in your state or the policy of your HSA company.
Frequently Asked Questions
What happens when you inherit an HSA depends on your relationship with the account owner. If you're the spouse, you can take over the HSA and use it as your own. If you're not the spouse, you'll have to withdraw all the funds and pay income tax on the amount you received.
It depends. Spouses who inherit an HSA don't pay income tax on the money they receive, but they may pay a 20% penalty tax if they use the funds for nonqualified expenses before age 65. Non-spouse beneficiaries pay income tax on the amount they inherit, regardless of how they use it.
The bottom line
Your choice of an HSA beneficiary affects how your HSA funds are handled when you die. Listing a spouse as your beneficiary keeps the account open and helps maintain the tax benefits. If you name anyone else as your beneficiary, the HSA closes when you die. Failing to name a beneficiary will make the funds taxable on your final tax return. It’s worth taking the time to determine your beneficiary so you can control what happens to your account when you die.
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References
Consumer Financial Protection Bureau. (2024). What is a revocable living trust?
Insurance Information Institute. (n.d.). What is a beneficiary?
Internal Revenue Service. (2024). Definition of a trust.
Internal Revenue Service. (2024). Instructions for Forms 1099-SA and 5498-SA (2024).
Internal Revenue Service. (2024). Publication 555 (03/2020), community property.
Internal Revenue Service. (2024). Publication 969 (2023), health savings accounts and other tax-favored health plans.
This article is solely for informational purposes. This article is not professional advice concerning insurance, financial, accounting, tax, or legal matters. All content herein is provided “as is” without any representations or warranties, express or implied. Always consult an appropriate professional when you have specific questions about any insurance, financial, or legal matter.
