A Health Savings Account, or HSA, can be a helpful tool when it comes to planning for future medical expenses.
In terms of probate, though, an HSA can add an additional layer of complexity to a deceased individual’s estate. If you’ve created an HSA or are considering an HSA, It’s important to understand where the funds in an HSA go (or don’t go) after you pass away.
Let’s take a look at some of the most common questions we encounter when it comes to HSAs.
What is an HSA?
A Health Savings Account is an investment vehicle where an individual makes contributions to plan for future medical expenses. Think of an HSA as an investment vehicle or savings vehicle, like an IRA or brokerage account. The only difference is that an HSA is used specifically to save for medical expenses.
HSAs have 3 major tax advantages:
- Contributions to the HSA are tax-deductible
- Interest accumulated in the HSA is tax-deferred
- Withdrawals from the HSA are tax-free
Those are just a few of the main advantages to setting up an HSA. Another huge perk of an HSA is how the account stays with the original owner.
As outlined by the Internal Revenue Service, IRS, another advantage of an HSA is that the account is “portable.” It stays with you regardless of where you work.*
Although the funds in an HSA stay with the individual who funds the HSA, the account itself stays with an “HSA custodian.”
An HSA custodian, also known as an HSA administrator, can be a bank, financial institution, insurance company, brokerage firm, or other IRS-approved institution.
Does setting up an HSA mean that an individual can just put however much they’d like in the HSA and call it a day?
No, definitely not.
Each year, the IRS outlines how much an individual or family can contribute into an HSA.
In 2022, the HSA contribution limits were $3,650 for an individual and $7,300 for a family. Any individual aged 55 and older could contribute an additional $1,000 as a catch-up contribution.
In 2023, the HSA contribution limits are $3,850 for an individual and $7,750 for a family. Anyone 55 and older can contribute an extra $1,000 as a catch-up contribution.
In 2024, the HSA contribution limits will be $4,150 for an individual and $8,300 for families. And once again, anyone 55 and older can contribute an extra $1,000 as a catch-up contribution.
It’s important to pay attention to those contribution limits; the IRS has strict penalties for over-contributing.
If you donate more than the yearly maximum, you may be subject to an excise tax of 6% on your excess contributions in the year you contributed too much and in each subsequent year that you fail to deduct the excess contribution and its earnings.
The extra contribution is regarded as taxable income as well. You might be able to avoid paying income tax and the excise tax for that year if you fix the problem before the tax filing deadline.
Just like the IRS has strict rules for making contributions to HSAs, there are also strict rules on what types of expenses HSA withdrawals can be used for.
You can only use HSA funds for qualified medical expenses, deductibles, coinsurance, and copayments.
You will incur a significant tax penalty if you use HSA funds for unauthorized expenses.
If you withdraw money for any non-permissible reason while under the age of 65, you'll be subject to a 20% penalty in addition to any applicable income taxes.
If you're 65 or older, you can use HSA funds without incurring penalties for ineligible expenses, but you will still be required to pay income taxes.
Because of those high penalties on withdrawing funds for ineligible expenses, it’s important to understand what a qualified medical expense might be.
Usually, qualified expenses are any doctor visits, medical equipment, dental care, or vision care for you, your spouse, or any dependents.
If you’re not sure about what exactly counts as a qualified medical expense, though, you should consult with your HSA plan provider and your healthcare plan provider.
What Happens to an HSA When the Owner Dies?
When the HSA owner dies, the funds either go to the named account beneficiary or to the owner’s estate.
Let’s break it down in more depth.
When an individual dies, a chunk of the individual’s assets (and sometimes all assets) will go through probate.
Certain assets (trusts, payable on death accounts, transfer on death accounts) avoid probate.
An HSA (health savings account) is typically one of the assets that avoids probate.
If you’re familiar with probate, then that should be a relief. After all, any chance to avoid that notoriously time-consuming process should be celebrated.
You’ll notice that I used the word “typically,” though— like most topics, when it comes to estate settlement there are certain situations where an HSA just might be included in the deceased’s estate.
When Does an HSA Avoid Probate?
Generally speaking, HSAs avoid probate 99% of the time.
HSAs are similar to other transfer-on-death (TOD) accounts in that they are usually set up with a named beneficiary.
When an individual sets up an HSA, they will usually need to name a designated beneficiary. It’s usually a requirement by the financial institution or investment manager of the HSA that a beneficiary be named.
The designated beneficiary receives the HSA funds once the original HSA owner passes away.
Now, an important distinction to make is that it does matter who the named beneficiary is. We’ll get to that in just a minute.
For now, though, we need to ask the next question:
When Does an HSA Go Into Probate?
We said earlier that HSAs avoid probate 99% of the time. So what circumstance would need to occur for the HSA to be included in the deceased’s estate?
An HSA will be included in probate if there is no named beneficiary and if the deceased individual has no surviving spouse.
In this case, the balance of the HSA will be included in the deceased’s estate and then distributed with other assets according to the deceased’s estate plan.
If there is a last will & testament stipulating where funds go after the owner’s death, then the HSA funds fall under the jurisdiction of the will.
The bottom line is that it’s important to name an HSA beneficiary.
If you have an HSA, or if you are thinking of establishing an HSA, you should ensure that a beneficiary is designated so that the funds in the HSA will avoid probate.
What if the Named Beneficiary is a Surviving Spouse?
We said earlier that the named beneficiary’s identity matters, and what we were referencing was the difference between the named beneficiary being a surviving spouse and a non-spouse.
This is what we were getting at:
Surviving spouses can receive the deceased owner’s HSA and continue to enjoy the tax advantages of the HSA.
If an HSA owner designates his spouse as the account beneficiary, the surviving spouse will then inherit the HSA upon the owner’s passing.
The transfer of the HSA to the surviving spouse is not taxable.
Now typically, in order to own an HSA, you must meet certain healthcare plan requirements.
If the spouse is named as a beneficiary of the account owner’s HSA, though, those healthcare plan regulations do not apply. Even if the spouse does not participate in a healthcare plan that would typically allow for the establishment of an HSA, they may still enjoy the tax advantages of the deceased owner’s HSA.
It’s important to recognize that the surviving spouse will still be subject to the same limitations for additional contributions or future withdrawals.
Only to the extent that distributions from the HSA were not used for eligible medical costs will the distributions be taxable.
The surviving spouse may name a beneficiary to receive any funds still in the HSA after the death of the spouse, roll over (or directly transfer) part or all of the HSA's account balance into another HSA (or an Archer MSA), and contribute to the HSA through rollovers, transfers, and contributions as long as the necessary conditions are met.
If the spouse does choose to withdraw funds from the account to pay for non-qualified medical expenses, they will be forced to pay a penalty of 20% on the withdrawal amount if they are under 65.
If the surviving spouse is over 65, they will not need to pay a penalty. They will, however, be on the hook for income tax on any amount that they withdraw.
Now, what if the named beneficiary is anyone other than the HSA owner’s surviving spouse?
That’s where things get even more interesting.
What if the Named Beneficiary is Not a Surviving Spouse?
Once it transfers, an HSA only remains an HSA if it transfers to a surviving spouse.
If a health savings account (HSA) transfers to an individual who is not the original owner’s surviving spouse, the HSA ceases to exist.
When this occurs, the HSA will close on the date of the deceased owner’s death.
The beneficiary will receive the assets that were held in HSA, but the funds that are received will be treated as taxable income.
Yes, that’s right—the beneficiary is liable for the fair market value (FMV) of the HSA at the original owner’s date of death, plus any interest that might have accumulated after the original owner’s passing.
This typically isn’t a bad thing—after all, who doesn’t mind earning more income, even if it means paying more in taxes?
But, in some cases, earning additional income could push a beneficiary into a higher tax bracket—meaning that the beneficiary could be on the hook for a larger tax liability than they might have originally anticipated.
Now, it’s important to point out that the non-spouse beneficiary does not have to pay any 20% tax penalty for using the funds for a non-qualified medical distribution. The non-spouse beneficiary will only have to report the FMV and interest as taxable income.
If you’re the beneficiary of an HSA and are worried about the additional tax liability, don’t worry: there are some ways to lower the taxes.
So if you happen to be the executor of the original owner’s estate and are still paying medical bills that the original owner incurred before their death, you can use funds from the owner’s HSA to pay the medical bills. You can do this for any medical expenses that were incurred within a year of the owner’s passing.
This might be a smart way to minimize the funds in the HSA and reduce your overall tax liability.
Can You Name a Trust as the Beneficiary of an HSA?
Yes, it is perfectly valid to name a trust as the beneficiary of a health savings account (HSA).
If you own an HSA and either don’t have a spouse or different individual to name as the designated beneficiary, you might consider the option of naming a trust as the beneficiary of an HSA.
This is an especially helpful option if you’re considering leaving the funds in an HSA to a minor.
Naming a trust as the beneficiary of an HSA will ensure that the funds are set aside for the beneficiary. The funds will be protected from any legal proceedings or guardianship disputes.
There is one major drawback to naming a trust as the beneficiary of an HSA:
If you do decide to name a trust as the beneficiary of an HSA, the HSA amount will be included as taxable income on your final income tax return.
Although that is a drawback, some individuals believe that the protection of a trust outweighs the additional income taxes that will occur.
FAQ's about HSAs and Probate
We encounter a number of questions surrounding HSAs and probate, so we’ve taken the time to consolidate some of the most common questions here:
Can you change an HSA beneficiary more than once?
Yes, you can change an HSA beneficiary as many times as you want. There is no limit to the amount of times that you can name beneficiaries.
It is important to note that some community-property states require that you obtain spousal approval before you change beneficiaries.
The following states have laws that stipulate that you cannot change your HSA beneficiary without first obtaining approval from your spouse:
- New Mexico
If you live in one of those states, watch out! You better be on your spouse’s good side before you try to change the beneficiary of your HSA.
I’m a non-spouse beneficiary of an HSA. How do I know the fair market value?
If you’re the non-spouse beneficiary of an HSA and are worried about calculating the HSA’s fair market value (FMV), don’t fret—it’s not your responsibility.
The HSA custodian—usually a bank, brokerage, or financial institution—will provide a Form 5498-SA to the HSA beneficiary in the same year that the account owner passes away. The HSA custodian must also deliver a Form 5498-SA to the IRS.
Form 5498-SA is informational only. The form shows HSA contributions and rollover contributions, and it shows the FMV of the HSA in Box 5.
Although it might sound obvious, it’s your responsibility as the HSA beneficiary to make any necessary tax payments once you’ve received the HSA funds. The HSA custodian will not make tax payments on your behalf.
I’m a surviving spouse beneficiary of an HSA. Do the HSA funds ever expire?
No, HSA funds do not expire.
You are not required to use your HSA funds before the end of the year. Your HSA’s whole balance rolls over annually.
As the surviving spouse, you get to enjoy the same tax advantages as the original HSA owner. This means that the HSA funds will continue to grow tax-free.
In addition, of course, you will also be able to make tax-free withdrawals from the HSA for qualified medical purchases.
I want to set up an HSA. Can I name multiple non-spouse beneficiaries?
Yes, you can designate multiple beneficiaries on an HSA.
Although it’s not a common tactic, some HSA owners do decide to name multiple beneficiaries on their HSA.
Most HSA custodian institutions will allow you to allot specific percentages to each beneficiary. For example, you might choose to set up an HSA with 4 beneficiaries and give each beneficiary 25% of the HSA.
Or, depending on the situation, you might choose to set up an HSA with 4 beneficiaries and give each beneficiary different amounts: 60%, 20%, 15%, 5%.
The original HSA owner passed away but there are still medical bills to pay. Can I use the HSA funds?
This is one of the most common questions that we receive when it comes to HSA funds.
Yes, you can still use HSA funds for the original owner’s medical bills even after the original owner has passed away.
Let’s take a look at an example to see how this might work:
Example 1: Bill, a 100 year old widower, had a medical procedure at the end of 2022. At the beginning of 2023, Bill passed away. After Bill’s death, the bill for the medical procedure became due. The cost of the procedure, after insurance, was $2,000. John, Bill’s son and the executor of Bill’s estate, is the named beneficiary of Bill’s HSA. John can use $2,000 from the HSA to pay off the medical expenses. Even though Bill is deceased, this still counts as a qualified medical expense and is a tax-free withdrawal.
Now, it’s important to remember that you can only pay for the deceased’s medical expenses that occurred within a year of the deceased’s passing. Let’s take another look at the example of Bill and John:
Example 2: Bill had hip replacement surgery in late-2021. It was in the beginning of 2023 that Bill passed away. When looking through Bill’s records, John realizes that the medical expenses for Bill’s hip replacement were not paid. John uses funds from Bill’s HSA to pay off the medical expenses. Unfortunately, though, John has made a dangerous mistake. Only medical expenses incurred within one year of the HSA owner’s death count as a qualified medical expense. Because of this, John will be liable for any penalty that occurs as a result of the error.
As the designated beneficiary of the HSA or as the deceased individual’s executor, it’s important to understand the potential ramifications of paying medical bills with funds from the deceased’s HSA.
Is an FSA the same as an HSA?
No, a Flexible Spending Account (FSA) is not the same as a Health Savings Account (HSA).
It’s easy to confuse HSAs with FSAs, but it’s important to distinguish between the two.
An FSA (Flexible Spending Account) is an employer-sponsored, tax-advantaged account that allows employees to set aside pre-tax income for eligible healthcare or dependent care expenses.
There are different types of FSAs, including Healthcare FSAs for medical expenses and Dependent Care FSAs for childcare or eldercare costs.
FSAs are a way to reduce one's taxable income while setting aside money for anticipated out-of-pocket expenses, but they require careful planning as unused funds typically do not roll over to the next year.
Unlike an HSA, an FSA is generally "use-it-or-lose-it," meaning that funds must be used within the plan year or they are forfeited.
The Bottom Line: Beneficiaries Matter
At the end of the day, the most important lesson is that HSA beneficiaries matter.Who you choose as your HSA beneficiary can have major implications on whether the funds go through probate or bypass the probate process. This could mean the difference between HSA funds going directly to a beneficiary or being tied up in what can be a complicated, time-consuming legal process.
In addition, you also need to consider the potential taxes that are at stake.
Choosing an HSA beneficiary will likely mean that the beneficiary might be on the hook for potential tax liability if the funds are treated as taxable income. Or, if you decide to designate a trust as the beneficiary, the HSA funds will then be attributable to your income tax after you’re deceased.
If you already have an HSA, we encourage you to ensure that you have a named beneficiary on the account. That should be the first step in planning for the future.
And if you are considering establishing an HSA and are trying to determine who to name as the HSA beneficiary, we invite you to consider the following questions:
- Do I want the HSA to go through probate or bypass probate?
- Do I understand that naming a non-spouse beneficiary will mean that the beneficiary is liable for additional income taxes?
- Do I want to name one beneficiary or multiple beneficiaries?
- Do I want to consider naming a trust as the beneficiary of the HSA?
These questions will kickstart your planning as you begin the process of establishing an HSA.
No matter where you are in the estate settlement process, we’re here to help.
Whether you’re currently settling an estate, learning the ropes of being an executor, or just reading about HSAs for your own personal knowledge, our team has put together a toolbox of resources to help you and guide you throughout the way.
Here are a few of our most popular tools:
- Glossary of all Probate Terms
- Checklist of steps to take after someone passes away
- Ultimate Guide to Probate vs. Non-Probate Assets
And if you want to know more about us, check out how we’re transforming the future of probate and estate settlement. We promise you won’t be disappointed.