What to do When an HSA Owner Dies
By Caiti Christen, CIP
We just received notification that an HSA owner died. What should we do now with the account?
When receiving notification of an HSA owner’s death, your organization should obtain a copy of the death certificate, stop any automatic contributions or distributions associated with the account, and then review the current beneficiary designation form to determine who the appropriate beneficiary is. If there is no beneficiary designation form on file, then you will need to defer to your HSA plan agreement to determine the named default beneficiary within the document. As always, be sure to follow your organization’s policies and procedures for this situation should it arise, and ensure that you are adhering to the IRS rules when distributing assets to your beneficiary.
I have a client who recently died. He had an HSA and an IRA with us. Will his beneficiaries on both accounts have the same distribution options?
Although there are a few similarities between IRAs and HSAs, the beneficiary options are different. IRA beneficiaries generally have more options to choose from when distributing their inherited assets. HSA beneficiaries may be limited to one outcome, depending on whether they are a spouse or a nonspouse beneficiary. If the beneficiary is the HSA owner’s spouse, the HSA is treated as the surviving spouse’s own HSA as of the original HSA owner’s death. If a nonspouse beneficiary is named, the account ceases being an HSA as of the date of death and the beneficiary must include the HSA’s fair market value (FMV), plus any interest earned after the date of death, in her income for the year of the death.
An HSA owner died a few weeks ago. His spouse is the named beneficiary. Does the spouse need to sign any paperwork?
Although the HSA automatically became the spouse’s HSA as of the date of death, the spouse should complete any paperwork required to establish a new HSA if she does not already have one. If the spouse already has her own HSA, she could sign a transfer request form in order to move the assets from the decedent’s HSA to her own HSA. This will help ensure that all IRS reporting is done under the spouse’s name and Social Security number. As the new account owner, the spouse should also file Form 8889, Health Savings Accounts (HSAs), with her income tax return if she has made any contributions or taken any distributions from the HSA.
How are nonspouse beneficiary distributions reported?
Financial organizations must report distributions to a nonspouse beneficiary on Form 1099-SA, under the beneficiary’s name and Social Security number. Your financial organization should enter the amount distributed in Box 1, the date of death FMV in Box 4, and one of the following distribution codes in Box 3.
Code 4, Death distribution other than code 6, is used to report distributions to the HSA owner’s estate in any year and to report distributions to a nonspouse beneficiary in the year of the HSA owner’s death.
Code 6, Death distribution after year of death to a nonspouse beneficiary, is used to report distributions to a nonspouse beneficiary, other than an estate, that take place in any year after the HSA owner’s death.
What distribution options are available to nonperson beneficiaries (such as estates or trusts)?
Similar to a nonspouse beneficiary, when a nonperson beneficiary inherits an HSA, the account ceases being an HSA as of the date of death. Financial organizations must report death distributions to a nonperson beneficiary under the beneficiary’s name and tax identification number.
Are nonspouse and nonperson beneficiaries subject to the 20 percent penalty tax for nonqualified distributions?
Although death distributions are taxable to the beneficiary, they are not subject to the additional 20 percent penalty tax for nonqualified HSA distributions. The amount that the beneficiary must include in income (unless the beneficiary is the decedent’s estate) may be reduced by any payments made from the HSA for the decedent’s qualified medical expenses if paid within one year after the HSA owner’s death. The nonspouse beneficiary must file Form 8889 to report the date of death FMV as well as any of the HSA owner’s qualified medical expenses that were paid within one year of death.
