Health Savings Account Beneficiary Options

As I’ve written about many times throughout the last several years, health savings accounts are simply wonderful vehicles for not only medical expenses – but retirement planning.

When used properly they’re the only triple tax free investment account on the planet if used for qualified medical expenses. At worst if used wisely they’re similar to a regular IRA for retirement planning and savings.

But what if you die with a health savings account? What are the health savings account beneficiary options?


Health Savings Account Beneficiary Options – Different Than IRA’s

  • Spouse Beneficiary of an HSA

    • If an HSA owner is married and their spouse is the HSA beneficiary, the surviving spouse is automatically the beneficiary of the health savings account after the owner dies.
    • They can maintain the HSA as if it were their own, using it for qualified medical expenses or even retirement funding after age 65 only paying normal income tax (a 20% penalty applies for withdrawals prior to age 65).
  • Non-Spouse Beneficiary of an HSA

    • In the event of a non-spouse beneficiary of a health savings account, the HSA must cease to be treated as an HSA as of the date of the owners death.
    • The health savings account fair market value as of the owners date of death must be distributed and is taxable to the beneficiary whether it’s a person or the decedents estate (there is no 20% penalty however).
    • The taxable amount of the HSA will be reduced by any qualified medical expenses incurred by the decedent prior to their death.
    • Should the HSA grow in value post-death, the growth will be taxable to the non-spouse beneficiary as if it became a taxable investment account.


If the health savings account beneficiary is the decedent’s estate the value of the HSA is included on the owner’s final income tax return. The amount which exceeds the decedent’s qualified medical expenses will be taxable.


Not a good deal for HSA spousal beneficiaries

You may have noticed one major difference between spousal HSA beneficiaries and non-spousal beneficiaries, and it’s not favorable to the surviving spouse! A non-spousal beneficiary has the option to distribute the health savings account and AVOIDS the 20% penalty, only paying income tax on the distribution. This is similar to a regular IRA.

The spousal HSA beneficiary doesn’t have the option of closing the decedent’s HSA and treating it as a death distribution. In this regard, the spousal beneficiary is at a disadvantage, because if they withdraw funds for OTHER than qualified medical expenses prior to age 65 they’ll pay a 20% penalty. Presumably the way this rule was written was to strongly encourage surviving spouses to keep the health savings account in tact for future retirement and medical expenses.