HSAs After Death: What You Need to Know

Health savings accounts (HSAs) are a uniquely attractive savings vehicle. Unlike any other tax-advantaged account, they provide a triple tax benefit:

1. Contributions are tax-deductible.
2. They grow tax-free.
3. Withdrawals are tax-free if used for medical expenses.

Withdrawals after age 65, not for medical expenses, are subject to regular income taxes.

Some wealth advisors recommend that HSA owners treat their accounts like a super IRA, by maximizing their contributions and making few or no withdrawals. By the time they retire, they could have a substantial amount saved in their accounts. After retirement, they can withdraw their money tax-free to pay medical bills or use it for other purposes and pay regular tax on it.

HSAs are not subject to annual required minimum distributions as traditional IRAs are, so some HSA owners could end up with a substantial amount of money in their accounts by the time they die.

HSAs have their own set of rules on what happens when the account owner dies. These rules differ greatly from those for retirement accounts, such as IRAs and 401(k)s.

Because of these rules, HSAs are a great way to protect you and your spouse from future medical bills, but they are not the best vehicle for passing your wealth on to the next generation.

Surviving Spouse as the HSA Beneficiary

There is no such thing as a joint HSA co-owned by married people.

Each spouse who is eligible and who wants an HSA must open their own separate HSA. But one spouse can use their HSA to pay the other spouse’s medical expenses.

If you’re married and your surviving spouse is your HSA beneficiary (as is normally the case), your HSA automatically becomes your spouse’s HSA on the date of your death.¹ It retains its tax-advantaged status, and the transfer to your spouse is not a taxable distribution for tax purposes. Your spouse can take distributions from the HSA tax-free for qualified medical expenses (just like you when you were alive). This is the best possible outcome as far as taxes go.

Your HSA Beneficiary Is Not Your Spouse

What if your HSA beneficiary is not your spouse? This will occur if you were never married, you’re divorced, your spouse predeceased you, or you don’t want your spouse to be your beneficiary for some reason. Sooner or later, every HSA will have a non-spouse beneficiary.

When your beneficiary is not your spouse, your HSA stops being an HSA on the date of your death. The fair market value of all the funds in the account must be included in your non-spouse beneficiary’s income for the year of your death.² This could result in a substantial tax hit and is very different from the tax treatment for inherited IRAs or regular 401(k)s; non-spouse IRA and 401(k) beneficiaries have 10 years to withdraw all the money from the account and pay tax on it.

Example. John has $100,000 in his HSA. His wife died five years ago, so he named his only child, Sheila, as his beneficiary. He dies on June 1, 2026, so the HSA stops being an HSA on that date and Sheila must report the entire $100,000 on her personal return as income for 2026. Sheila was in the 22 percent tax bracket in 2025, but the $100,000 distribution plus some other good fortune puts her in the 32 percent and 35 percent brackets for 2026. She ends up paying $33,700 in federal income tax on her HSA distribution.

Naming your grandchildren (if you have them) instead of your children as your HSA beneficiaries will result in lower taxes if your grandchildren are in a lower tax bracket than your children.

There is a way for non-spouse beneficiaries to reduce the tax due on their HSA distributions: They can use the funds in the HSA to pay unpaid medical expenses for the deceased HSA owner within one year of their death.3 This distribution is tax-free—your beneficiary’s taxable HSA distribution will be reduced by this amount.

Example. Assume that Sheila’s father, John, from the above example died leaving an unpaid medical bill of $10,000 for hospice care. Sheila pays the bill three months later. She can reduce the taxable amount of her HSA distribution by $10,000 and need only pay tax on $90,000 instead of $100,000.

You Have No Beneficiary, or Your Estate Is the Beneficiary

If you have no HSA beneficiary or your estate is the beneficiary, your HSA stops being an HSA on the date of your death. The funds in the HSA must be included in your final decedent income tax return (not the estate’s separate income tax return) and will be taxed at ordinary income rates. There is no reduction for medical expenses paid after the date of death.

Your estate will be responsible for paying the income tax on the HSA distributions before distributing the money according to your will or state law.⁴ Because of these rules, it’s a big mistake not to name a beneficiary for your HSA.

Deathbed Distributions Can Reduce the Tax Hit When an HSA Owner Dies

Taxpayers who super-funded their HSAs by maximizing their contributions over many years and not withdrawing HSA funds to pay for medical expenses would appear to be in a bit of a pickle if they have non-spouse beneficiaries. But there is a way to reduce their beneficiaries’ tax bills: they can make tax-free HSA distributions to themselves for previous unreimbursed medical expenses while they are still alive.

HSA rules provide that any medical expenses incurred after an HSA is established and before the HSA owner dies are eligible for tax-free reimbursement from the HSA anytime before the HSA owner dies. All that’s required is that the expenses were⁵

• not previously reimbursed, and
• not deducted on the HSA’s owner’s return (Schedule A) as an itemized deduction.

Thus, an HSA owner who becomes seriously ill and has a large amount in their account can make tax-free withdrawals from their HSA for all past medical bills they paid themselves and did not deduct from their taxes. Such unreimbursed expenses could have been incurred many years before—it makes no difference so long as they were incurred after the HSA was established. These withdrawals could substantially reduce their HSA balance when they die, leaving much less money for their non-spouse beneficiary to pay taxes on.

Example. Ophelia established her HSA 15 years ago. She made the maximum contribution every year and never withdrew any funds to reimburse herself for medical expenses. As a result, her HSA has a $150,000 balance.

Ophelia is a widow, and her HSA beneficiary is her son, Jules. If Jules inherits the $150,000 after Ophelia dies, he’ll have to pay income tax on the entire amount the year he receives it. Ophelia becomes seriously ill with lung cancer and is not expected to live more than one year. Over the past 15 years Ophelia spent $4,000 per year out of her own pocket for medical and dental expenses, which she never deducted from her income taxes. She withdraws $60,000 tax-free from her HSA to reimburse herself for these expenses.

This leaves only $90,000 in the HSA when she dies. Jules need pay income tax on only $90,000 instead of $150,000. He receives the $60,000 tax-free from the estate.

You don’t have to wait until you’re on your deathbed to make such tax-free distributions; you can do it anytime. But you do need proper documentation of the expenses6 to prove three things:⁷

1. The expense was a qualified medical expense.
2. It wasn’t previously reimbursed.
3. It wasn’t taken as an itemized deduction.

Qualified medical expenses include unreimbursed medical, dental, and vision expenses such as doctor and dentist visits, hospital care, prescriptions (and non-prescription medications), and many other costs. These include expenses for your spouse and dependents.⁸ You can prove these with receipts.

You can also deduct medical-related mileage if you kept a mileage log.

You can prove that an expense wasn’t previously reimbursed with copies of itemized medical bills that show how much you paid out of pocket; your HSA account statements; and copies of your filed IRS Form 8889, Health Savings Accounts, for the year involved that show your total HSA distributions for the year.⁹

You can easily prove that you didn’t deduct the expense with copies of your Schedule A for the year involved.¹⁰

Key point. HSA owners should get into the habit of keeping receipts for their medical expenses. You don’t necessarily have to keep a receipt for every single expense, but at least do so for major expenses you pay yourself, including vision and dental work, which often isn’t covered by insurance. There are HSA expense tracker apps that can make it relatively easy to keep this documentation.

What About Withdrawing Your Money from the HSA?

You can withdraw money from your HSA at any time. But if you do so for a reason other than to reimburse yourself for a medical expense, the withdrawal is taxable income. If you’re under 65 years of age, you’ll have to pay a 20 percent penalty in addition to regular income tax on the withdrawal. There is no penalty if you’re 65 or older or disabled—you’ll just have to pay regular income tax on the withdrawal.¹¹

Technical Note

In this article, we did not mention that your HSA cash is in a tax-exempt trust or custodial account with a qualified HSA trustee approved by the IRS, such as a bank, savings and loan association, credit union, or insurance company.

The trustee is not important to the concepts in this article because you control the money in and money out of the account. You have the responsibility to identify expenses as medical expenses and to have the supporting records to prove it.

Takeaways

Here are four takeaways from this article:

1. If an HSA owner’s spouse is the beneficiary of the account, the account will automatically go to the spouse when the owner dies. No tax will be due, and the HSA will continue as an HSA for the surviving spouse.
2. If the beneficiary of an HSA is someone other than the owner’s spouse, the account automatically stops being an HSA on the date the owner dies. The beneficiary must pay regular income tax on all the funds in the HSA the year they’re received.
3. A non-spouse beneficiary can use the funds in the HSA to pay unpaid medical expenses for the deceased HSA owner within one year of their death. This distribution is tax-free.
4. HSA owners can lower their account balance by taking tax-free withdrawals to reimburse themselves for past medical expenses—provided those expenses were paid after the account was established and were not claimed as tax deductions. This can be done at any time, but the HSA owner must have proper documentation for these unreimbursed expenses.
   
   

• IRCSection223(f)(8) (A ).
• IRCSection223(f)(8) (B )(i).
• IRCSection223(f)(8) (B )(ii)(I).  
• IRCSection223(f)(8) (B )(i)(II).  
• IRS Notice 2004-50, Section A-39.
• IRS 502, Medical and Dental Expenses (2025), dated Feb. 6, 2026, p s. 5-14.
• IRS Form 8889, Health Savings Accounts (HSAs) (2025).
• Schedule A (Form 1040), Itemized Deductions (2025).
• IRC Section 223(f)(4).