Slott, Levine: Here’s What Happens to the HSA When a Client Dies

The HSA is then treated in one of two ways, depending upon whether the beneficiary is the account holder’s surviving spouse.

A spouse “automatically and instantly” becomes the HSA account holder, Levine explained. Importantly, such a transfer of ownership is not taxable, and future distributions from the HSA will be subject to income tax only to the extent that they were not used for qualified medical expenses.

Once the account is transferred to their name, the surviving spouse can designate a new beneficiary to receive any amounts remaining in the HSA upon their own death. Other options include rolling some or all of the HSA’s account balance into another HSA they already own.

All Other Inheritors

Levine and Slott then discussed what happens to HSA funds inherited by anyone other than a surviving spouse.

Generally, the HSA then ceases to be an HSA. In turn, an amount equal to the fair market value of the account assets as of the date of the account holder’s death is included in the beneficiary’s gross income.

Notably, a non-spouse beneficiary may reduce that amount by any payments made from the HSA for qualified medical expenses incurred by the deceased account holder before death. But, as Levine and Slott emphasized, such payments must be made within one year after the original owner’s death.

In addition, the original owner can name their own estate as the HSA beneficiary. In such a case, the remaining amount is included in the decedent’s gross income for the year in which the death occurred.

Pictured: Jeff Levine and Ed Slott