Health savings accounts (HSAs) allow you to save money for healthcare expenses while enjoying some tax breaks. This type of tax-advantaged account is associated with high deductible health plans (HDHPs). If you have an HSA, you can name a beneficiary to receive the money in your account should something happen to you. There are some HSA beneficiary rules to know before designating someone to inherit your savings.
If you need help getting the most out of your HSA, consider working with a financial advisor.
What Is a Health Savings Account and How Does It Work?
A health savings account is a savings account that’s intended to be used for qualified healthcare expenses. To have an HSA, you must first have a high deductible health plan. Your employer might offer one of these plans or you may purchase one on your own if you’re self-employed.
The IRS has certain rules for HSAs, including how much you can contribute each year and what you can use the money for. Contribution limits are determined by whether you have individual or family coverage. Here’s how much you can save in an HSA for 2022:
- $3,650 for individual plans
- $7,300 for family plans
If you have an HSA through your job, your employer can make contributions on your behalf. The total amount of HSA contributions made by employers and employees can’t exceed the annual limit specified by the IRS.
So how do you spend money in an HSA? When you enroll, you should be issued a debit card. This debit card is linked to your account and you can use it to pay for healthcare expenses, the same way that you’d use any other debit card. The IRS determines what counts as HSA eligible expenses but generally, the list is fairly exhaustive.
HSAs can be an attractive savings option because of the tax benefits they offer. If you have an HSA, you can enjoy triple tax advantages in the form of:
- Deductible contributions
- Tax-deferred growth
- Tax-free withdrawals
If you take money from your HSA to pay for qualified healthcare expenses, those withdrawals are tax-free. The only time you’d pay income tax on HSA withdrawals is if you use the money for non-eligible expenses. If you’re under age 65, you’d also pay a 20% tax penalty on the distribution.
What Is an HSA Beneficiary?
An HSA beneficiary is someone who will inherit the money in your health savings account when you pass away. In that sense, a beneficiary for an HSA isn’t that different from a beneficiary for a life insurance policy, 401(k) or Individual Retirement Account (IRA).
Why would you need to name someone as a beneficiary to your health savings account? The simple answer is to make sure those funds aren’t lost in limbo if something happens to you. By naming a beneficiary, you can decide who should get that money.
HSA Beneficiary Rules
When naming a beneficiary for your HSA, it’s important to understand what your options are and what responsibilities are assigned to the person who inherits your account.
In terms of your who can be a beneficiary for an HSA, the options include your:
- Siblings or other relatives
If a spouse is designated as your beneficiary, they become the owner of your HSA after you pass away. That means the benefits of the account, including tax-free withdrawals for qualified healthcare expenses, are theirs to enjoy as well. They can leave the account open and withdraw the money as needed or move it to their own HSA if they also have a health savings account.
Choosing your spouse to be the beneficiary for your HSA may be the most logical option if you’d like to minimize tax impacts. If you choose someone other than a spouse, such as your children or a sibling, they do not get the same benefits. They’d be required to take a full distribution from the account, which would be taxable to them. That could be problematic if a large HSA distribution temporarily pushes them into a higher tax bracket.
Naming your estate as the beneficiary is something you might consider if you don’t have any single person you’d like to receive those assets. Any funds in the HSA would be transferred to your estate after you pass away. When your executor files your file tax return, HSA monies would be treated as taxable income.
Of these options, naming your spouse as beneficiary offers the most favorable tax treatment. But if you’re unmarried, divorced or widowed that might not be doable. Talking to your financial advisor can help you decide what your best option is, based on the choices you have available.
What Happens If You Don’t Name an HSA Beneficiary?
If you have an HSA but haven’t named a beneficiary, one of two things can happen when you pass away. First, if you’re married, the company holding your HSA may automatically assign your spouse to be the designated beneficiary. Once again, that means the HSA would become theirs for all intents and purposes.
That may not be an issue if you’d always intended to name your spouse as beneficiary anyway. But if you’re legally separated or planning to divorce, you might not want your HSA money to go to your soon-to-be former spouse.
If you’re single and haven’t named someone to inherit, HSA beneficiary rules dictate that the money be transferred to your estate. The distribution would be included in your final tax return. What happens to the money at this point can depend on whether or not you had a will or trust in place.
For example, if you have a will you might include a provision specifying that any amounts not specifically named be distributed equally among your heirs. Or you might use a will to create a pour-over trust, which would transplant HSA funds into a trust after you die.
If you don’t have a will, then your estate would be divided up following state inheritance laws. This means that you have no control over where your assets go; instead, the state decides who gets what. That’s perhaps the most important reason to name beneficiaries for health savings accounts.
What If You’re the Beneficiary of an HSA?
Inheriting an HSA can have some implications for you if you’re the beneficiary. First, you’ll need to understand what it means from a tax perspective. Again, if you’re the spouse of the original account owner then HSA tax benefits transfer over to you along with the money in the account. But if you’re not a spouse, that could complicate your tax filing so you may want to talk to a tax pro about how to handle those funds.
You also need to know what’s required to claim the funds in an HSA you inherit. For example, the company that holds the HSA may need a copy of the death certificate or require you to fill out ownership transfer forms before you can access the money. You can contact the HSA administrator to find out what’s required.
The Bottom Line
An HSA can be an attractive way to save for healthcare expenses if you’re eligible to contribute to one. Understanding HSA beneficiary rules can help you decide who to designate to receive any remaining funds in the account once you pass away.
Retirement Planning Tips
- Consider talking to a financial advisor about how to incorporate an HSA into your financial plan and who to name as beneficiary. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you have a Flexible Spending Account in place of an HSA, note that these accounts do not allow you to name a beneficiary. Money in an FSA is use it or lose it, meaning that if you don’t spend it down each year, you can’t carry the remaining funds forward. If you pass away, your spouse or heirs may be able to request reimbursement for eligible medical expenses from your employer, but only for ones that were incurred prior to your death.
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