Health Savings Accounts Part 2
Our March 2017 blog posting (Health Savings Accounts) talked about the tax and financial benefits of using Health Savings Accounts, especially when an individual can allow the contributions to stay in the account versus withdrawing the funds. When an individual can pay medical costs without withdrawing from the Health Savings account, the amounts in the account can compound and grow over time (“triple play”).
The purpose of this blog posting is to point out some other planning tips related to Health Saving Accounts (“HSAs”):
- Make sure and name a beneficiary for the HSA, just like you would for an IRA, 401K, etc. There are no restrictions on who can be a beneficiary.
- For married couples, the general recommendation is to name a spouse as the beneficiary. Just like for an IRA, at death, the surviving spouse can treat the funds as their own. Distributions for qualified medical costs are tax free and the spouse does not need to have a high deductible policy to maintain the HSA. If, however, they do have a qualifying high deductible policy, then contributions can be made into the account (whereas this cannot be done if there is no high deductible policy).
- There is no such thing as an inherited HSA, even if the beneficiary is the spouse. If the spouse is the beneficiary, they have to “roll over” the account. For non-spouse beneficiaries, the account becomes taxable in the year of death. There is no “stretch” option like IRA and ROTH accounts. The taxable amount can be reduced by qualified medical expenses for the deceased HSA owner paid by the beneficiary within one year of death.
- In those situations with non-spouse beneficiaries, planning is needed to think about the account and the most tax efficient way to use the funds. For example, the owner may want to withdraw funds sooner than later to avoid leaving the beneficiary with a tax bill once the owner passes.
- If the owner designates his or her estate as the beneficiary, upon death, the total distribution is included in the deceased owner’s final tax return. Tax planning tip – if there are significant medical costs due to an illness, it could make sense to designate an estate as a beneficiary. For IRAs and 401Ks, we generally do not recommend naming an estate as a beneficiary. However, for a Health Savings Account, it could make sense.
This is not a complete discussion of all of the income and financial planning aspects of what happens upon the death of a HSA owner. If you have questions about your financial situation, send us an email using the Contact Us section of our website. Ed Slott, an expert in the area of IRAs and HSAs, puts out a monthly newsletter, Ed Slott’s IRA Advisor. His April 2017 newsletter has a section devoted to this topic and that newsletter was part of the research for this blog posting.