Unlike other pre-tax benefits, HSAs are employee-owned, and each employee can name HSA beneficiaries through their Forma account. Beneficiaries are people (or sometimes a legal entity like a trust) that receive the HSA money if you were to pass away. Without beneficiaries, the balance in your HSA will instead go to your estate and be treated as taxable income when your executor files your final tax return.
What are the types of beneficiaries?
There are 2 types of beneficiaries, primary and contingent.
- Primary beneficiaries are the first person (or group of people) HSA funds will be transferred to when the account owner passes away.
- Contingent beneficiaries act as a backup, in case the primary beneficiaries have already passed away. If all primary beneficiaries are deceased when the account owner passes away, contingent beneficiaries will receive the money instead.
Important: The account owner can have both kinds of beneficiaries, but they must have at least 1 primary beneficiary before adding a contingent beneficiary.
Who can be a beneficiary?
Spouses, friends, family members — even legal entities like a trust — can be HSA beneficiaries. However, the IRS lays out different rules for how beneficiaries receive the funds depending on their relationship to the account owner.
The biggest differences are between a spouse and a non-spouse.
Naming a spouse as a beneficiary
When the account owner names a spouse as a beneficiary, the spouse becomes the owner of the HSA after the original account owner’s death. Because the HSA is still intact, this isn't considered a taxable event and they get all the same benefits including:
- Withdrawing money tax-free to pay for qualified medical expenses
- Maintaining tax-free growth (both interest earned on cash balance and returns from investing)
- And contributing to the account if they have HSA-qualified insurance
They also face the same 20% penalty for withdrawing money to pay for non-qualified medical expenses, and the 6% excise tax on contributions over the limit.
Naming someone other than a spouse as a beneficiary
If the account owner’s beneficiary is someone other than a spouse, the HSA doesn't transfer ownership to them. Instead, the account is closed on the date of the account owner’s death and is no longer considered an HSA.
After the close date, the beneficiary receives a distribution equal to the fair market value of the account balance (cash and investments) and they have to report it as taxable income.
Because of this tax event, it could put the beneficiary into a higher tax bracket than usual, so we recommend your employees speak with a tax advisor to decide who to name as beneficiaries.
Naming a trust as a beneficiary
The last option is naming a trust as the account owner’s beneficiary. The advantages and disadvantages to naming a trust as a beneficiary are more complicated, so we recommend your employees speak with a tax advisor before choosing this option.
How do employees add beneficiaries to their Forma HSA?
You can add or edit beneficiaries from the “Manage HSA” dropdown menu on your HSA details page. Simply complete the Add or update HSA beneficiaries form and submit to Forma.