Don’t Overlook HSA Beneficiary Designations

A little over a year ago, my wife and I elected to have our family’s health insurance be provided by her employer through a “high deductible health plan,” as defined in Section 223(c)(2) of the Internal Revenue Code.  That plan, in turn, is paired with a Health Savings Account (HSA).

An HSA is usually funded with pre-tax dollars, just as is the case with a traditional IRA or qualified retirement plan.  With respect to my wife’s HSA, this applies to whatever she contributes, as well as to whatever her employer contributes.  Individuals other than my wife can also contribute, just not in a tax-favored manner.  Whatever is contributed, along with anything it may earn, avoids taxation so long as it either remains in the account or is used to pay certain “qualified medical expenses” as defined by law.

My wife is referred to as the “beneficiary” of her HSA.  If a beneficiary dies at a time when his or her HSA still has any money in it, that amount is dealt with pursuant to any designation the beneficiary may have made.  There are three basic successor beneficiary scenarios:

  • The successor beneficiary is the deceased beneficiary’s spouse.  When this happens, everything simply stays in the HSA, which at that point becomes the surviving spouse’s HSA.
  • The successor beneficiary is the deceased beneficiary’s estate.  When this happens, the HSA dissolves.  Whatever is in it is distributed to the estate, and that amount is taxable to the deceased beneficiary on his or her final income tax return.
  • The successor beneficiary is an individual or entity other than the deceased beneficiary’s surviving spouse or estate.  Just as in the second scenario, the HSA dissolves and the money in it is distributed to the successor beneficiary.  The amount distributed is taxed to the successor beneficiary.

Gift planners will recognize that the third scenario is essentially identical to what happens when the owner of a traditional IRA or qualified plan dies.  This means it can be worthwhile for a charity to promote the idea of having supporters – especially those who are not married – designate the organization as the successor beneficiary of whatever may remain in an HSA upon death.

True, the likelihood that significant amounts, or even anything at all, will remain in the HSAs of its donors when they die is probably considerably less than in the case of traditional IRAs and qualified plans.  Still, it can’t hurt to have donors keep their HSAs in mind as they contemplate assets they might use to make a deferred charitable gift.