Unlike other pre-tax benefits, you own your HSA and can designate beneficiaries directly from your Forma account. Beneficiaries can be individuals or legal entities like a trust, who will receive your HSA funds if you pass away. Without designated beneficiaries, your HSA balance will go to your estate and be considered 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 is the first person (or group of people) HSA funds will be transferred to when the account owner passes away.
- Contingent beneficiaries serve as a backup if the primary beneficiaries have passed away. If no primary beneficiaries are living at the time of the account owner's death, the contingent beneficiaries will receive the funds.
Important: You can designate both primary and contingent beneficiaries, but you 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 a non-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 speaking with a tax advisor to decide who to name as beneficiaries.
Naming a trust as a beneficiary
You can also name a trust as a beneficiary. The advantages and disadvantages to naming a trust as a beneficiary are more complicated, so we recommend speaking with a tax advisor before choosing this option.
How do I add beneficiaries to my Forma HSA?
Regardless of your current employment status, you have the ability to add or modify beneficiaries through the 'Manage HSA' dropdown menu on your HSA details page. From the dropdown, select "Manage beneficiaries" and add or edit those allocations.