HSA Nonspouse Beneficiary, HSA Access
By Ben Maas, CIS, CIP, CISP
What happens to an HSA when the owner passes away and the beneficiary is a not the spouse?
In any situation where the HSA death beneficiary is a nonspouse—either a person or an entity, such as an estate or trust—the HSA ceases to be an HSA as of the date of death. The HSA assets must be paid out to the nonspouse beneficiary and the HSA’s fair market value (FMV) is included in the beneficiary’s gross income for the year of death, as is any interest earned in the HSA after the date of death. The distribution is taxable, but is not subject to the additional 20 percent penalty tax.
Nonspouse beneficiaries that are persons may reduce the amount included in income by using the inherited assets to pay for the decedent’s qualified medical expenses within one year after death. The nonspouse beneficiary must complete IRS Form 8889, Health Savings Accounts (HSAs), to report the date of death FMV and the amount of any qualified medical expenses of the deceased HSA owner that were paid within one year of death.
All HSA distributions must be reported on Form 1099-SA, Distributions from an HSA, Archer MSA, or Medicare Advantage MSA. For death distributions, financial organizations should report the amount distributed from an HSA in Box 1 of Form 1099-SA, the HSA’s FMV on the date of death in Box 4, and one of two distribution codes in Box 3. For distributions to the estate and for distributions to a nonspouse beneficiary in the year of an HSA owner’s death, use Code 4, Death distribution other than code 6. For distributions to a nonspouse beneficiary other than an estate that take place in any year after the year of death, use Code 6, Death distribution after year of death to a nonspouse beneficiary.
Can someone besides an HSA owner have access to the HSA?
Like IRAs, HSAs are individual accounts and may be owned by one person only. The HSA owner has the sole power to authorize HSA transactions. But what if the HSA owner is not the only individual who needs access to the HSA assets? What if, for example, the HSA owner’s spouse takes the children to the doctor’s office or pays for prescriptions, and thus needs access to the HSA? Thankfully, the IRS confirms in Notice 2008-59 that an HSA owner may designate other individuals to withdraw assets from his HSA, provided that individual signs an authorized signer agreement. Individuals with an authorized signer agreement may deposit HSA contributions and take distributions, and may have access to the account’s check or debit card.
Alternatively, some financial organizations may require HSA owners to sign a power of attorney document to grant this kind of authority over an HSA. They may offer fill-in-the-blank POA forms, which permit a client to grant authority to an agent, who may then conduct routine HSA transactions.