What is the tax treatment of an HSA after the death of the HSA owner?

The tax treatment of an HSA after the death of the HSA owner depends on whether a spouse or non-spouse is designated as the death beneficiary of the account.

 

Spouse as death beneficiary: If the death beneficiary is a spouse, the HSA is treated as the surviving spouse’s own HSA. Distributions to the surviving spouse for qualified medical expenses would be exempt from federal income tax and penalties.

 

Non-spouse as death beneficiary: If the death beneficiary is a non-spouse, the HSA ceases to be an HSA as of the date of death, and the non-spouse death beneficiary includes the fair market value of the HSA in his or her income for the year of the death.

 

NOTE: The amount that must be included in the death beneficiary’s income (unless the death beneficiary is the decedent’s estate) is reduced by any payments made by the HSA for the decedent’s qualified medical expenses, if paid within one year after death.