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HSA Beneficiary Options

Choosing Beneficiaries for Your HSA

Written by: Marcy Slack

A health savings account (HSA) is an account that you put tax-deductible, interest-earning money in to use for medical expenses. Health savings accounts have many tax advantages. Learn more about the advantages here.

Naming a Beneficiary.
When you set up your HSA, you can choose a beneficiary should you pass away before using all the funds in the account. However, did you know that only surviving spouses named as beneficiaries are able to retain the tax advantages associated with these accounts? It is important that owners of these accounts understand the pros and cons of different beneficiary options.

Spouse as beneficiary:
If one names a spouse as the beneficiary of the account, he or she can continue to take advantage of the tax advantages. If the surviving spouse is not old enough to be eligible for Medicare, then he/she can make additional deductible contributions to the account. The surviving spouse can pay any outstanding qualified expenses that one incurred during their lifetime without any income tax liability. They can also withdraw funds from the account to pay qualified medical expenses they incur as well. Any withdrawals that are not related to qualified health expenses are taxable at ordinary income tax rates.

In addition, if a surviving spouse remarries, they can designate the new spouse as the named beneficiary and these tax advantages continue for the new beneficiary.

Naming a Non-Spouse as Beneficiary:
If you name a non-spouse as the beneficiary, then all assets in the plan must be distributed immediately, and they will be taxed at ordinary income tax rates of the beneficiary. The only exception is that any prior unpaid qualified health expenses of the deceased owner can be paid without tax consequences. So, if you have a choice regarding whom to select as beneficiary of the HSA account, one should consider a party who is not in a high tax bracket.

There would be no tax advantages in leaving the assets in the account to a trust account. The trust would incur immediate tax liability on the fair market value of the HSA for any funds left to the trust.

If one has charitable organizations they want to support, they can name them as beneficiaries. The charities will not incur any tax liability associated with the gift.

The bottom line is that in most cases, naming a spouse as a beneficiary is by far the best alternative. If one decides to name a spouse as the beneficiary, then it is important that the spouse understands the advantages of the account. Make sure the surviving spouse knows that if distributions are made to cover qualified health care expenses, that there will be no income tax liabilities. The spouse beneficiary should also be informed that if there are any unpaid health care expenses associated with the deceased spouse, the funds from the HSA account should be used to pay these expenses so that there will be no income taxes due.