A Health Savings Account (HSA) can positively affect your estate plan. How? In addition to serving as a viable option to reduce health care costs, an HSA’s funds grow on a tax-deferred basis. In fact, an HSA is similar to a traditional IRA or 401(k) plan in that it’s a tax-advantaged savings account funded with pretax dollars.
Funds can be withdrawn tax-free to pay for a wide range of qualified medical expenses. Bear in mind that withdrawals for nonqualified expenses are taxable and, if you’re under age 65, subject to penalties.
HSAs by the numbers
To provide these benefits, an HSA must be coupled with a high-deductible health plan (HDHP). For 2025, an HDHP is a plan with a minimum deductible of $1,650 ($3,300 for family coverage) and maximum out-of-pocket expenses of $8,300 ($16,600 for family coverage). In addition, you must not be enrolled in Medicare or covered by any non-HDHP insurance (a spouse’s plan, for example). Once you enroll in Medicare, you can no longer contribute to an HSA, but you can continue to withdraw funds to pay for qualified expenses.
Currently, the annual contribution limit for HSAs is $4,300 for individuals with self-only coverage and $8,550 for individuals with family coverage. If you’re 55 or older, you can add another $1,000. Typically, contributions are made by individuals, but some employers contribute to employees’ accounts.
Reducing health care costs
HSAs can lower health care costs in two ways by 1) reducing your insurance expense, HDHP premiums are substantially lower than those of other plans, and 2) allowing you to pay qualified expenses with pretax dollars.
In addition, any funds remaining in an HSA may be carried over from year to year, continuing to grow on a tax-deferred basis indefinitely. This is a huge advantage over health care Flexible Spending Accounts (FSAs), where the funds must be spent or forfeited. (Note that employers may allow employees to carry over a certain amount of FSA funds to the following year. When you turn 65, you can withdraw HSA funds penalty-free for any purpose (although funds that aren’t used for qualified medical expenses are taxable).
To the extent that HSA funds aren’t used to pay for qualified medical expenses, they behave much like an IRA or a 401(k) plan.
Benefiting your estate plan
Unlike traditional IRA and 401(k) plan accounts, HSAs need not make required minimum distributions once you reach age 70½. Except for funds used to pay qualified medical expenses, the account balance continues to grow on a tax-deferred basis indefinitely, providing additional assets for your heirs. The tax implications of inheriting an HSA differ substantially depending on who receives it, so it’s important to consider your beneficiary designation.
If you name your spouse as beneficiary, the inherited HSA will be treated as his or her own HSA. That means your spouse can allow the account to continue growing and withdraw funds tax-free for his or her own qualified medical expenses. If you name your child or someone else other than your spouse as beneficiary, the HSA terminates and your beneficiary is taxed on the account’s fair market value.
It’s possible to designate your estate as beneficiary, but in most cases that’s not the best choice, because a beneficiary other than your estate can avoid taxes on qualified medical expenses paid with HSA funds within one year after death. When the estate is the beneficiary, the entire value of the HSA is taxable to you on your final income tax return. This presents a planning opportunity, particularly if you’re in a lower tax bracket than the beneficiary or beneficiaries of the HSA.
A win-win
Opening and contributing to an HSA offers tax-advantaged options that can help reduce health care costs and provide estate planning benefits. Please contact us with any questions.
About The Author
Meaghan E. Kelly
Meaghan Kelly’s practice focuses on all aspects of trusts and estates – including estate and tax planning, taxation, probate, trust administration,…
