What are the tax consequences of HSA distributions following the death of the accountholder?

If a spouse is the named beneficiary of the HSA, the HSA belongs to the spouse upon the accountholder’s death, subject to UMB's consent and the completion of applicable documents as required by UMB. The surviving spouse is not required to include any amount in gross income for tax purposes as a result of the accountholder’s death, and he or she is subject to income tax only on those distributions that are not made for qualified medical expenses.

If, at the time of death, the HSA passes to a named beneficiary other than the surviving spouse, the HSA ceases to be an HSA as of the date of accountholder death, and the beneficiary is required to include the fair market value of the HSA assets as of the date of death in his or her gross income for the taxable year that includes the date of death. The includible amount is reduced by the amount in the HSA used, within one year of accountholder death, to pay the accountholder’s qualified medical expenses incurred prior to death. If there is no named beneficiary of the HSA, the HSA ceases to be an HSA as of the date of death, and the fair market value of the HSA assets as of the date of death is includible in the accountholder’s gross income for the year of death and considered to be part of their estate.

 

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