Can you inherit an HSA? This is a question that many people ask when they come across a Health Savings Account (HSA) left behind by a loved one. An HSA is a tax-advantaged savings account designed to help individuals pay for qualified medical expenses. But what happens when the account holder passes away? Can their beneficiaries inherit the funds? Let’s explore this topic in detail.
Health Savings Accounts, or HSAs, are established for individuals who have a high-deductible health plan (HDHP). These accounts allow account holders to save money on a pre-tax basis for qualified medical expenses, including doctor visits, prescriptions, and even some over-the-counter medications. One of the most attractive features of an HSA is that the funds can be rolled over from year to year, and they grow tax-free until they are used for eligible medical expenses.
When an HSA account holder passes away, the funds in the account can be inherited by their designated beneficiaries. However, the rules regarding inheritance can vary depending on the relationship between the account holder and the beneficiary. Here’s a breakdown of the different scenarios:
1.
Spouse Beneficiaries: If the HSA account holder’s spouse is the designated beneficiary, they have the option to inherit the entire balance of the account. The spouse can continue to use the funds for qualified medical expenses, or they can withdraw the funds tax-free and use them for any purpose.
2.
Other Beneficiaries: If the account holder’s designated beneficiaries are not their spouse, they can still inherit the HSA funds. However, there are some important differences in how the funds can be used:
a.
Qualified Medical Expenses: The inherited funds can be used for qualified medical expenses tax-free, just like the original account holder. This includes expenses for the beneficiary, their spouse, and dependents.
b.
Non-Qualified Medical Expenses: If the inherited funds are used for non-qualified medical expenses, the beneficiary will be subject to income tax on the withdrawal amount, plus a 20% penalty. This penalty is designed to discourage beneficiaries from using the funds for non-medical purposes.
3.
Transfer to a New Account: Beneficiaries can also transfer the inherited HSA funds to a new HSA in their own name. This allows them to continue growing the funds tax-free for future medical expenses. However, the new account must be established within one year of the account holder’s death.
It’s important to note that HSAs have a unique feature that sets them apart from other types of retirement accounts. Unlike IRAs or 401(k)s, the funds in an HSA can be inherited by any beneficiary, regardless of their age or relationship to the account holder. This flexibility makes HSAs an attractive option for individuals looking to leave a legacy of financial security for their loved ones.
In conclusion, the answer to the question “Can you inherit an HSA?” is yes, you can. The rules surrounding inheritance can vary depending on the relationship between the account holder and the beneficiary, but the funds can be used for qualified medical expenses or transferred to a new HSA. As always, it’s a good idea to consult with a financial advisor or tax professional to understand the specific rules and regulations that apply to your situation.
