What Happens To My HSA When I Die?
What is an HSA?
A Health Savings Account (HSA) is a pretax savings account that allows participants of high-deductible health plans (HDHP) to cover out-of-pocket health care costs. To be considered HDHP, you must be covered the first day of the month and the minimum annual deductible for individual and family coverage is $1,350 and $2,700, respectively.
Aside from having HDHP coverage, the following conditions must be met in order to qualify for an HSA account:
- You are not enrolled in Medicare. Note: A person may elect to decline Medicare when he or she turns 65; however, this may not be advisable and personalized advice should be sought from your advisor before making this decision.
- You cannot be claimed as a dependent on anyone else’s tax returns for the prior year.
- You have no other health coverage plans.
Qualifying individuals may contribute up to $3,500 in their HSA for 2019 and $7,000 for families.
An HSA allows the account owner to pay or reimburse certain out-of-pocket medical expenses for yourself and your family. Generally, HSAs can be used to cover eyeglasses, X-rays, doctor’s visits, dental treatment, therapy, medical expenses related to qualified long-term care services (including a portion of long-term care insurance premiums), and a host of other qualifying medical expenses (please visit the IRS website to learn what else is includible).
Your HSA balance rolls over from year to year, even if you no longer have HDHP coverage. Once you are 65, you can no longer contribute to your HSA. However, you can still use the remaining money for out-of-pocket medical expenses.
What Happens to My HSA When I Die?
When you open your HSA, you are prompted to designate a beneficiary of the account upon your death. You have the freedom to change the beneficiary of your HSA at any point during your lifetime. Based on the beneficiary designation below, these are potential outcomes for your HSA account:
Your Spouse as beneficiary: Upon your death, your HSA will be directly transferred to your spouse and becomes their HSA. The spouse can use the HSA funds tax-free to pay for qualified healthcare expenses even if they are not enrolled in an HDHP. Additionally, the spouse can get reimbursed for qualified medical expenses incurred by the account owner before death as long as these expenses were paid out of pocket and not previously reimbursed. Note, spouses over 65 can use the HSA funds for non-medical expenses but any funds used for non-qualified medical expenses will be treated as ordinary income taxes.
A Non-Spouse as Beneficiary: If your beneficiary is not your spouse, your HSA ends on the date of your death and your account closes. Remaining funds are distributed to the beneficiary, and the fair-market value becomes taxable income. However, the beneficiary can continue to use the HSA funds tax-free to pay for medical expenses incurred by the former account holder for up to 1 year after their death.
No Beneficiary Named: All assets in your HSA account will be distributed to your estate and taxed as income on your final income tax return.
An HSA can be an important element of your legacy. Upon passing, the treatment of your HSA will vary depending on who you designate as your beneficiary. It’s important to understand the impact of these decisions on the surviving beneficiary while you are still alive. Please contact your advisor at Heck Capital to learn more about planning for the future of your HSA.
Authored by Michael Bogard, CFA on September 5, 2019
About the Author: Michael Bogard, CFA is a Business Development / Client Relationships Senior Associate at Heck Capital Advisors. Michael earned the right to use the Chartered Financial Analyst® (CFA®) designation after completing the program, fulfilling the work experience requirements, and gaining acceptance as a member of the CFA Institute. The Chartered Financial Analyst® (CFA®) charter gives a strong understanding of advanced investment analysis and real-world portfolio management skills. CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.
Heck Capital is an independent, Registered Investment Advisory Firm providing comprehensive investment management, personalized advice, and strategic financial guidance since the 1950s. We serve goal-driven individuals, families, established institutions, non-profit organizations, and foundations/endowments; striving to help our clients achieve their investment objectives, helping to simplify their financial lives, with the goal to create lasting legacies.