The fair market value of an HSA is the total of the account’s uninvested cash plus the market price of any investments inside it, measured on a specific date. For everyday use, that’s just the balance on your statement. It becomes a tax number only when something forces a valuation on a fixed date, most often the account holder’s death, a divorce, a prohibited transaction, or an excess contribution left in the account at year-end.
How the Number Is Calculated
Two components make up the value: cash (including accrued interest) and the closing market price of any stocks, bonds, or mutual funds held in the account. That’s the figure your custodian shows on monthly or quarterly statements, and it’s what you’d look at to decide whether the account can cover a medical bill.
The same calculation becomes a formal fair market value when it’s tied to a specific date for tax or legal purposes. The routine snapshot date is December 31, which your custodian reports on Form 5498-SA. Other dates get set by circumstance: the account holder’s date of death, the disqualification date after a prohibited transaction, or a valuation date chosen by a divorce court. The math doesn’t change. What changes is that the number now carries legal consequences.
When FMV Turns Into a Tax Number
For ordinary medical withdrawals, FMV never enters the picture. It matters when a triggering event forces the IRS or a court to fix a dollar figure to the account on a set date.
Death of the Account Holder
The tax result depends entirely on who inherits. If the designated beneficiary is your surviving spouse, the HSA simply becomes your spouse’s HSA. No tax is owed, and the account keeps its tax-advantaged status.1Office of the Law Revision Counsel. 26 US Code 223 – Health Savings Accounts
For anyone else, the outcome is far less forgiving. When a non-spouse inherits, the account stops being an HSA on the date of death, and the full fair market value as of that date becomes taxable ordinary income to the beneficiary in the year of death.1Office of the Law Revision Counsel. 26 US Code 223 – Health Savings Accounts On a large invested HSA, that can be a substantial and unexpected tax hit. One partial offset: the taxable amount is reduced by any of the decedent’s qualifying medical expenses that the beneficiary pays within one year after the date of death.2Internal Revenue Service. Publication 969 – Health Savings Accounts and Other Tax-Favored Health Plans
If the estate is the beneficiary rather than a named person, the FMV is included on the decedent’s final income tax return instead of being taxed to an heir.1Office of the Law Revision Counsel. 26 US Code 223 – Health Savings Accounts That distinction can land the income in a different bracket, which matters for planning.
Divorce and Separation
Transferring some or all of an HSA to a spouse or former spouse under a divorce or separation agreement is not a taxable event. The receiving spouse becomes the account beneficiary and the funds keep their HSA status.1Office of the Law Revision Counsel. 26 US Code 223 – Health Savings Accounts The receiving spouse typically opens a new HSA to hold the funds, and no penalty or income recognition applies.
FMV still matters here, because it sets the account’s value as a marital asset. Courts pick a valuation date, which varies by jurisdiction; common choices are the date the divorce petition was filed or the date of trial. The custodian’s statement as of that date is the FMV. Because HSA balances move with investments, the chosen date can meaningfully change what each spouse is assigned.
Prohibited Transactions
Use your HSA in a way the tax code prohibits, such as pledging it as security for a loan, and the account loses its tax-advantaged status entirely. The FMV as of January 1 of the year the violation occurs is treated as a taxable distribution and must be included in your gross income.3Internal Revenue Service. Instructions for Form 8889 – Health Savings Accounts Additional penalties may apply on top of that. The practical rule is to treat the HSA as a medical savings vehicle and never as collateral.
Excess Contributions and the 6% Cap
Contribute more than the annual limit and the excess sits in the account attracting a 6% excise tax for every year it stays there.4Office of the Law Revision Counsel. 26 US Code 4973 – Tax on Excess Contributions to Certain Tax-Favored Accounts and Annuities The tax is capped at 6% of the account’s total fair market value at the end of the tax year, so the year-end FMV directly sets the maximum penalty you can owe.
You can avoid the excise tax by withdrawing the excess, along with any earnings attributable to it, before the due date of your return (including extensions) for the year the contribution was made. The withdrawn earnings are reported as income on that year’s return.2Internal Revenue Service. Publication 969 – Health Savings Accounts and Other Tax-Favored Health Plans Miss that deadline and the 6% applies for the year, then again each year afterward, until either the excess is withdrawn or a future year’s contributions run enough below the limit to absorb it.
Where FMV Shows Up on Tax Forms
Three forms handle the reporting.
Form 5498-SA
Your custodian files this form and sends you a copy. Box 5 reports the fair market value of the HSA as of December 31 of the tax year, and the form also lists total contributions made during the year.5Internal Revenue Service. Instructions for Forms 1099-SA and 5498-SA You don’t file it yourself, but check it against your records because errors here can generate IRS notices later.6Internal Revenue Service. Form 5498-SA – HSA, Archer MSA, or Medicare Advantage MSA Information
Form 1099-SA
Any distribution during the year is reported by the custodian on Form 1099-SA. That covers routine medical reimbursements and, on the death of the account holder, the full FMV distributed to a non-spousal beneficiary.5Internal Revenue Service. Instructions for Forms 1099-SA and 5498-SA You use the information from the form to complete your own return.
Form 8889
Form 8889 is your responsibility. File it with your federal return if you made or received HSA contributions, took any distributions, or acquired an interest in an HSA because the account holder died. Line 14a is where you report the fair market value of an inherited HSA as of the date of death. If your account was disqualified by a prohibited transaction, the FMV as of the disqualification date is also reported on this form.3Internal Revenue Service. Instructions for Form 8889 – Health Savings Accounts
Penalties for a Wrong Number
Reporting the wrong FMV is not an academic problem. If the error leads to a significant tax underpayment, the IRS can add an accuracy-related penalty of 20% on the underpaid amount. For individuals, that penalty kicks in when you understate the correct tax by the greater of 10% or $5,000.7Internal Revenue Service. Accuracy-Related Penalty On a large inherited HSA where the FMV wasn’t properly reported, the combined tax and penalty can be severe.
The most common misstep involves a non-spouse beneficiary who doesn’t realize the account became taxable income at death, or who understates the FMV because the investments inside were hard to value. If you inherit an HSA that holds anything beyond cash, get the custodian’s official valuation statement as of the date of death and put that figure on Form 8889. That documentation is your best defense if the IRS questions the number.