When you contribute to a Health Savings Account (HSA) that allows you to save for qualified medical expenses, you’re creating a financial asset you need to secure for your own peace of mind — as well as for your heirs. If you haven’t yet named a beneficiary on your HSA account, you could be unintentionally creating a headache for any heirs. Designating a beneficiary allows that person to transfer funds efficiently with minimal tax burden after you pass away. It’s a simple step to take, yet many people forget to do it.

Smooth Transfer of Funds

With a designated beneficiary, your heir(s) can avoid lengthy probate proceedings and access the HSA money without delays. Remember that the impact of taxes varies depending on the type of beneficiary you name:

• Spouse.
• Nonspouse.

If you designate your spouse as beneficiary, your HSA simply becomes their HSA. They can continue to use the funds for qualified medical expenses without paying any taxes.

If you designate a nonspouse as beneficiary, the heir can no longer use the HSA funds as an HSA. Instead, the fair market value of the account becomes taxable income for your heir in the year of your death. If you designate a nonspouse as your beneficiary, you may want to let them know about their potential tax liability.

Avoid Default Rules

If you don’t name a beneficiary, you are subject to default rules such as your HSA being included as part of your estate by default. This typically means:

• HSA funds may become taxable.
• Probate court proceedings, which can be time consuming and costly, may be required.

Take Control by Naming a Beneficiary

You control the transfer of your HSA funds when you name a beneficiary. This ensures your HSA goes to someone you choose and not left to the state to decide.

To designate a beneficiary for your HSA Bank account through PDRMA Health, click here to complete the online designation form and follow the instructions to submit. If you have an HSA account not with HSA Bank, contact your bank for instructions on how to designate a beneficiary.

You also can include HSAs as part of your larger estate planning strategy. Even if you don’t create a formal estate plan, you should be sure to designate a beneficiary for your HSA funds. Your heirs will appreciate the benefits of tax efficiency and simplicity when you are gone.