HSA Beneficiary Strategy

Submitted by Jonathan Seder on Fri, 2021-10-29 16:08

I’m using my HSA as a tax-advantaged savings vehicle – see e.g. https://irahelp.com/slottreport/what-if-you-could-pay-health-care-costs-retirement-tax-free-dollars) If I know I am at the end of my life, I reimburse myself from the HSA. But I want it to accumulate tax-free as long as possible, and I may not be able to act at that time… So I’d be grateful for some advice about HSA beneficiaries.

IRS Pub 969 (2000) pp. 3-11 discusses HSAs. A “TIP” on page 10 (italics theirs) reads: “The amount taxable to a beneficiary other than the estate is reduced by any qualified medical expenses for the decedent that are paid by the beneficiary within 1 year after the date of death.” Does this mean that if the beneficiary is the estate, the funds cannot be used to reimburse the estate for qualified medical expenses?

On p.10 under “Death of HSA Holder,” it states that “If your estate is the beneficiary, the value is included on your final income tax return.” What does “included” mean? Will the whole HSA balance be taxed as ordinary income if the estate is the beneficiary, or can my executor reimburse my estate, and then treat any remainder as income on my estate tax return?

Thanks very much for your assistance.



Submitted by Jonathan Seder on Sun, 2023-11-19 17:07

Pub 559 adds, ” If the decedent’s estate acquires the interest, the fair market value (FMV) of the assets in the account on the date of death is included in income on the decedent’s final return.” So it really sounds like it’s important to name beneficiaries other than the estate, and to give documentation and instruction to the beneficiaries so they can reimburse the estate… which will effectively erase taxes on the amount. Right?

Submitted by David Mertz on Sun, 2023-11-19 18:59

  • For pre-death expenses paid by the beneficiary within one year of the decedent’s death to be permitted to be excluded from the beneficiary’s income, the beneficiary must be a person.  Section 223(f)(8)(B)(ii)(I).
  • If the estate is the beneficiary, the FMV as of the date of death must be included on the decedent’s final tax return, not treated as income to the estate.  Section 223(f)(8)(b)(i)(II).  What happens with regard to any gain or loss after the date of death is not explicitly stated, but because the HSA ceased to be an HSA upon the death of the decedent, it would seem any gain or loss would have to be treated as a gain or loss to the estate outside of the HSA.

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