Health Savings Accounts are often praised for their tax advantages, and for good reason. For eligible taxpayers, an HSA can offer deductible or pre-tax contributions, federally tax-free growth, and tax-free withdrawals when used for qualified medical expenses. That combination can make an HSA a powerful planning tool during life. But the tax treatment can change quickly after death.
For taxpayers who build meaningful HSA balances, especially high-income earners using HSAs as long-term savings vehicles, beneficiary planning should not be an afterthought. An account that worked efficiently during life can create an unexpected tax burden if it passes to a non-spouse heir.
Why the HSA Inheritance Rules Matter
HSAs were designed to help individuals with qualifying high-deductible health plans pay for current and future out-of-pocket medical expenses. They are not inherited like ordinary brokerage accounts, and they do not follow the same post-death rules as many retirement accounts.
A taxable brokerage account may receive a step-up in basis at death, depending on the asset and facts involved. Many inherited retirement accounts are subject to distribution rules that may allow taxable income to be spread over time. HSAs generally do not work that way for non-spouse beneficiaries.
Under IRS Publication 969, if someone other than the account owner’s spouse is the designated beneficiary, the account stops being an HSA. The fair market value of the account becomes taxable to the beneficiary in the year the account owner dies.
In plain terms, a child, relative, friend, or other non-spouse beneficiary who inherits a large HSA may have to recognize the entire balance as taxable amount all at once. That can push the beneficiary into a higher tax bracket and reduce the after-tax value of the inheritance.
The Spouse Beneficiary Rule
The most favorable result generally applies when the spouse is the designated beneficiary. If a spouse inherits the HSA, the account is treated as the surviving spouse’s HSA after death. The surviving spouse can continue to use the account for qualified medical expenses, and the account can retain its tax-advantaged status.
That is why married taxpayers often name a spouse as the primary HSA beneficiary. It allows the account to continue functioning as an HSA rather than forcing an immediate taxable event. The analysis changes when the beneficiary is anyone other than a spouse.
What Happens When a Non-Spouse Inherits an HSA
If the beneficiary is not the spouse, the HSA loses its tax-advantaged status at death. The beneficiary generally must include the fair market value of the HSA in income for the year of death. If the estate is the beneficiary, the value is included on the account owner’s final income tax return.
There is an important reduction rule. The taxable amount for a non-estate beneficiary may be reduced by qualified medical expenses of the decedent that are paid by the beneficiary within one year after the date of death.
That rule can help, but it does not fully solve the issue. If the HSA balance is large and final medical expenses are limited, the beneficiary may still face a substantial taxable income event.
This can be especially problematic when the beneficiary is already a high earner or lives in a high-tax state. A beneficiary who inherits an HSA in a high-income year may face a much different tax result than the account owner expected.
Why This Risk Is Becoming More Relevant
The inherited-HSA issue is not limited to a small group of taxpayers. HSA adoption has grown significantly. According to research from Devenir and the American Bankers Association’s HSA Council, 39.3 million HSAs existed at the end of 2024, covering approximately 59.3 million Americans.
At the same time, more taxpayers are using HSAs as long-term planning vehicles rather than simple spending accounts. Some pay medical expenses out of pocket, keep records, and allow HSA assets to remain invested for potential long-term growth. That strategy can be powerful during life. But it can also leave a larger balance exposed to less favorable inheritance rules.
The risk may be especially relevant for widows, widowers, unmarried taxpayers, and taxpayers whose intended heirs are children, relatives, friends, or charities rather than a surviving spouse. Broader demographic trends also make non-spouse beneficiaries more common.
For many taxpayers, the planning question is no longer just, “How much can I accumulate in an HSA?” It is also, “How should this account be used or distributed before it becomes a tax problem for someone else?”
Planning Step 1: Use the HSA for Qualified Medical Expenses During Life
The most tax-efficient use of an HSA is generally to pay or reimburse qualified medical expenses. For taxpayers with large HSA balances, that may mean using the account more actively in retirement rather than preserving it indefinitely. HSA funds may generally be used tax-free for qualified medical expenses, which can include many out-of-pocket medical costs, dental and vision expenses, and certain other expenses described in IRS Publication 502.
After age 65, HSA funds may also be used for certain Medicare premiums. Certain long-term care insurance premiums may also qualify, subject to age-based limits.
Using HSA funds for qualified expenses during life allows the taxpayer to preserve the account’s best tax treatment. It may also reduce the balance that could otherwise pass to a non-spouse beneficiary as taxable income.
Planning Step 2: Use Prior Unreimbursed Medical Receipts
Some taxpayers intentionally pay medical expenses out of pocket and save receipts so the HSA can remain invested. That strategy can create future flexibility. If the expenses were incurred after the HSA was established, were not reimbursed from another source, and were not deducted elsewhere, the taxpayer may be able to take a later tax-free reimbursement from the HSA.
For taxpayers with large HSA balances, prior unreimbursed receipts can become an important planning tool. Taking tax-free reimbursements during life can move value out of the HSA before death. Once reimbursed, the funds can be used for other purposes, including spending, reinvestment in a taxable brokerage account, gifting, or broader estate planning.
Documentation is essential. Taxpayers should keep receipts, invoices, explanation of benefits statements, payment records, and a clear tracking system showing which expenses have and have not been reimbursed.
Planning Step 3: Consider Taxable Withdrawals After Age 65
HSA distributions used for non-qualified expenses are generally taxable. Before age 65, they may also be subject to an additional 20% tax.
After age 65, the additional 20% tax generally no longer applies, although non-qualified withdrawals are still taxable as income. That does not mean taxable withdrawals should be the first choice. Qualified medical withdrawals are still more tax-efficient. But in some cases, taxable withdrawals after age 65 may deserve consideration.
For example, if the account owner is in a relatively low tax bracket and the likely non-spouse beneficiary is in a much higher tax bracket, taking some taxable withdrawals during life could produce a better overall family tax result than leaving the full HSA balance to that beneficiary.
This is a tax modeling question. The right answer depends on the account owner’s income, the beneficiary’s expected income, state tax exposure, charitable goals, health care needs, and available medical receipts.
Planning Step 4: Review Beneficiary Designations
HSA beneficiary designations should be reviewed regularly, especially when there is a marriage, divorce, death, change in family circumstances, or shift in estate planning goals.
A spouse beneficiary generally receives the most favorable treatment because the HSA can continue as the spouse’s own account. A non-spouse beneficiary may face immediate taxable income. If the estate is the beneficiary, the HSA value is generally included on the account owner’s final income tax return.
Taxpayers should also consider who the non-spouse beneficiary is. A high-income heir in a high-tax state may face a much larger tax cost than a lower-income beneficiary in a lower-tax state.
The point is not that non-spouse beneficiaries should never be named. The point is that the decision should be intentional.
Planning Step 5: Consider Charitable Beneficiaries
For charitably inclined taxpayers, an HSA may be a candidate for charitable beneficiary planning. Because charities are generally tax-exempt, naming a qualified charity as beneficiary may avoid the income tax burden that could otherwise apply to an individual non-spouse beneficiary. Some taxpayers may also consider a donor-advised fund, depending on the custodian’s rules, the estate plan, and charitable goals.
This approach is not appropriate for everyone. But when a taxpayer has both charitable intent and multiple asset types available to leave to heirs, it may be worth evaluating which assets are best suited for individuals and which are best suited for charity.
In some cases, it may be more tax-efficient to leave other assets to family members and designate charitable beneficiaries for assets that would otherwise create ordinary income.
Planning Step 6: Do Not Leave the Beneficiary Line Blank
At a minimum, HSA owners should name a beneficiary. If no beneficiary is named, the account may pass according to the custodian’s default rules. In many cases, that can mean the estate becomes the beneficiary. If the estate is the beneficiary, the HSA value is generally included on the account owner’s final income tax return.
That result can reduce flexibility, accelerate tax, and create administrative friction. It may also limit the ability to use the one-year rule for qualified medical expenses paid after death. Naming a beneficiary does not solve every issue, but it helps avoid unnecessary uncertainty.
The Takeaway
HSAs can be excellent lifetime planning tools. For eligible taxpayers, they can support tax-efficient saving, medical expense planning, and retirement flexibility. But they require different thinking when it comes to inheritance.
An HSA that passes to a spouse can generally continue as an HSA. An HSA that passes to a non-spouse beneficiary can lose its tax-advantaged status and become taxable income in the year of death. That makes large HSA balances worth reviewing before retirement and estate planning decisions are finalized.
The strongest approach is coordinated. Taxpayers should review beneficiary designations, preserve medical receipts, evaluate whether to use HSA funds during retirement, consider the tax profile of intended heirs, and coordinate the account with the broader estate plan.
Aura Advisors helps individuals, families, and business owners evaluate tax-advantaged strategies with clarity and defensibility. For taxpayers with meaningful HSA balances, the planning question is not only how to build the account. It is also how to use it well.
For More Reading
- The Hidden HSA Strategy High-Income Earners Should Know
- Health Savings Accounts
- Actions in 2026 That Can Lower Your 2025 Taxes
Aura Advisors is a boutique tax consulting and compliance firm working with start-ups, emerging growth companies, and affluent individuals. Making it safer for good people and good companies to continue to do good things.