Why it is Crucial to Designate a HSA Beneficiary?

Jaburg Wilk
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As high deductible health insurance plans are becoming more popular, an important component is health savings accounts (HSA).  In addition to having current tax advantages, there is specific tax treatment of HSA accounts upon the death of the account holder.  While not a requirement for HR departments, here is a quick tip that employees may find valuable.   

All participants in a qualified health savings account should designate a beneficiary for their HSA account.  Upon the death of the HSA account holder, the favorable tax treatment allows the HSA account to transfer to the surviving spouse (but only the surviving spouse) as if it was their HSA account.  There are no tax consequences and the account becomes the surviving spouse’s account.

The beneficiary designations are not held by the employer, rather they are held by the servicing financial institution or HSA trustee, which may be a bank, an insurance company, or anyone already approved by the IRS to hold the HSA accounts. 

If the spouse is not the designated beneficiary, the account is no longer an HSA and the fair market value of the HSA becomes taxable to the beneficiary in the year in which the account holder passes. There is an exception for qualified medical expenses of the account holder paid within a year after the account holder’s death.  If an estate is the beneficiary, the value is included on the decedent’s final income tax return.

If the employee does not elect a beneficiary, the HSA does not automatically transfer to the spouse, but rather it receives the unfavorable non-spouse tax treatment. Therefore, it is good practice to remind employees to review their beneficiary designations at least annually, including their HSA account.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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