A health savings account is a useful tool for medical expenses.
Medical expenses are often quite costly.
Although insurance can help, it does not often provide full coverage.
You will be paying some of your expenses out of pocket.
According to a recent The Street article titled “HSAs and Estate Planning,” utilizing a health savings account (HSA) can be a wise financial choice for its tax and estate planning benefits.
The IRS currently allows workers who have high-deductible health insurance plans with HSA eligibility to make pre-tax contributions to these accounts.
Those with individual plans can contribute to up to $3,650 in 2022.
People with family plans can contribute up to $7,300 in 2022.
The contributions and any interest earned can be withdrawn with no penalties or taxes when the money is used for qualified medical expenses.
After age 65, the 20 percent penalty for non-medical withdrawals will no longer apply.
What will happen to this account when you die?
The answer depends on the beneficiary you designate for your health savings account.
If your surviving spouse inherits the HSA, your spouse will be listed as the owner of the account.
All funds will remain in the HSA and will not be included in your estate.
Your spouse will then be able to use the fund as an HSA.
How is an HSA treated when you designate someone other than a spouse as the beneficiary?
The HSA will no longer be considered an HSA when you die.
Instead, the funds will be distributed in their entirety to the non-spouse beneficiary.
Although the 20 percent penalty for making non-qualified withdrawals does not apply, the inherited amount must be included in the taxable income of the heir.
This means the beneficiary will owe income taxes at his or her marginal tax rate for the full HSA balance unless a portion has been used by the heir to pay for outstanding medical expenses of the account owner within a year of the death of the original owner.
Because the HSA funds are used to pay for expenses of the original owner, such funds are not considered a part of the inherited amount.
What if the estate of the HSA owner is listed as the beneficiary rather than an individual?
The balance of the HSA will be included as part of the gross income for the owner in the year of his or her death.
Instead of being included in the estate, the HSA will be reported as income for the final tax return.
An HSA owner can also designate a charity as the beneficiary.
Charities do not have to pay any taxes or penalties on funds received from any HSA.
When deciding how to use an HSA as part of your estate plan, it is wise to discuss your goals with an experienced estate planning attorney.
Until you die, you should use that HSA for your qualifying medical needs as intended.
Reference: The Street (Dec. 9, 2021) “HSAs and Estate Planning”