HSA - Treatment when owner dies; spouse was not named

Submitted by Tom Belding on Thu, 2022-09-08 19:04

The owner of an HSA died. His wife was not named as beneficiary. The sponsor has indicated that they will be sending her a check for the balance. Does she have any options in this situation? She has sent them a death cert, and they’ve assigned her as beneficiary. They’ve mentioned a trustee to trustee transfer process, but it’s not clear how that would work; she does not have an HSA of her own. If they send her the check, is this taxable income, or can she set up an HSA account based on the proceeds? She is now retired. Help!

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Permalink Submitted by David Mertz on Thu, 2022-09-08 21:48

Assuming that there was no beneficiary named, what does the HSA custodian’s HSA agreement say regarding the default beneficiary under these circumstances? It’s likely that it says that the surviving spouse is the default designated beneficiary, in which case the surviving spouse automatically becomes the HSA owner and the HSA just needs to be retitled or trustee-to-trustee transferred to a new HSA for the benefit of the surviving spouse as owner. The surviving spouse need not have any previously existing HSA.
If the agreement deems her to be the designated beneficiary and they make a distribution to her (say, by check), the distribution would be paid to her as owner of the original HSA and can be rolled over within 60 days to another HSA which she can open, otherwise any portion not applied to qualified medical expenses is taxable income to her and, if she is under age 65, to a 20% penalty.