When you inherit an HSA, what you owe depends almost entirely on whether you were married to the account owner. A surviving spouse takes over the account as their own with no tax due at death. Any other beneficiary owes ordinary income tax on the full fair market value of the account in the year the owner died. That split comes from 26 U.S.C. ยง 223(f)(8), and it drives every other decision that follows.1Office of the Law Revision Counsel. 26 USC 223 – Health Savings Accounts
If You Are the Surviving Spouse
The account becomes yours. The custodian retitles it in your name, and from that day forward every ordinary HSA rule applies as if you had opened it.1Office of the Law Revision Counsel. 26 USC 223 – Health Savings Accounts Nothing is taxed at the time of death. Withdrawals you take for qualified medical expenses remain tax-free. If you are enrolled in a qualifying high-deductible health plan, you can keep contributing.
Because the account is now yours, the 20% additional tax on non-medical withdrawals applies to you the same way it applied to the original owner. Pull money out before age 65 for anything other than qualified medical expenses and the withdrawal is taxed as ordinary income and hit with the 20% penalty.1Office of the Law Revision Counsel. 26 USC 223 – Health Savings Accounts Once you turn 65 the penalty falls away. Non-medical withdrawals are still ordinary income at that point, but the account behaves much like a traditional retirement account. Medical withdrawals stay tax-free at any age.2Internal Revenue Service. Publication 969 – Health Savings Accounts and Other Tax-Favored Health Plans
If You Are Not the Spouse
The account stops being an HSA on the date the owner died. Its full fair market value on that date becomes taxable income to you in the year of death.1Office of the Law Revision Counsel. 26 USC 223 – Health Savings Accounts There is no rollover, no stretch, no way to preserve the tax shelter. The whole balance lands on your tax return in one year.
That balance stacks on top of whatever you already earned, which can push you into a higher bracket. A person who normally earns $45,000 and inherits a $30,000 HSA reports $75,000 in income for the year. Any interest or investment gains the account earns between the date of death and the date you actually receive the money are also taxable to you, because the tax shelter ended when the owner died.
Shrinking the Taxable Amount
You can reduce the taxable inheritance dollar-for-dollar by paying qualified medical expenses the decedent incurred before death. You have to pay them within one year of the date of death for the offset to count.2Internal Revenue Service. Publication 969 – Health Savings Accounts and Other Tax-Favored Health Plans Unpaid hospital bills, outstanding prescription charges, and other qualifying medical costs of the deceased person all count. Track them down before the year runs out.
If the decedent’s estate owed federal estate tax, you may also be entitled to an income-in-respect-of-a-decedent deduction for the portion of that estate tax attributable to the HSA income you reported.1Office of the Law Revision Counsel. 26 USC 223 – Health Savings Accounts This matters only for larger estates, but when it applies it can be substantial.
If the Estate Is the Beneficiary
When the owner named the estate as beneficiary, or named no one at all, the fair market value of the HSA goes on the decedent’s final tax return rather than to an individual.3Internal Revenue Service. Publication 559 – Survivors, Executors, and Administrators The executor reports it on the decedent’s Form 1040 or 1040-SR for the year of death.
The practical problem is cash. The estate needs enough liquidity to pay the resulting tax, and if the HSA was the main liquid asset, the executor may have to sell other property to cover the bill. What’s left after taxes becomes a general estate asset and moves through probate before any heir sees it. A named beneficiary avoids all of this, because beneficiary designations override the will and bypass probate. If you are still planning your own account, check your designation. Most custodians let you update it online in a few minutes.
Reporting the Inheritance on Your Tax Return
Non-spouse beneficiaries report the income on Form 8889, attached to Form 1040. The IRS requires a specific procedure: write “Death of HSA account beneficiary” across the top of the form, enter your own name and Social Security number, and skip Part I entirely. On Part II, line 14a, enter the fair market value of the HSA on the date of death. On line 15, enter any qualifying medical expenses of the decedent that you paid within one year of the death. The form works the taxable amount out from there.4Internal Revenue Service. Instructions for Form 8889
The custodian will send you a Form 1099-SA. Box 1 shows the gross distribution, Box 4 shows the fair market value on the date of death, and Box 3 carries a distribution code that tells the IRS who you are. Code 4 covers distributions to the estate or to any beneficiary in the year of death. Code 6 covers non-spouse beneficiaries receiving distributions after the year of death. A surviving spouse taking distributions after the year of death gets code 1, reflecting that the account is now their own.5Internal Revenue Service. Instructions for Forms 1099-SA and 5498-SA If the custodian already paid medical expenses from the account on the decedent’s behalf, the amount in Box 4 may not match what you expected. Reconcile the 1099-SA against the date-of-death balance and any post-death payments before you fill in Form 8889.
Claiming the Money From the Custodian
The paperwork is routine but the custodian will not bend on documentation. You need a certified copy of the death certificate; a photocopy won’t do. You need the decedent’s Social Security number to locate the account. You will complete a beneficiary claim or distribution request form, provide government-issued ID, and give your own Social Security number for tax reporting. Select “death of account holder” as the distribution reason.
After you submit everything, expect roughly one to two weeks while the custodian’s legal team verifies the death certificate and your standing as beneficiary. Once verified, the custodian either transfers the funds to an account you designate or mails a check. You’ll get written confirmation of the distribution, and the 1099-SA arrives after the end of the tax year.
State Taxes: Watch California and New Jersey
Most states follow federal HSA rules, so state treatment mirrors what happens on your federal return. California and New Jersey do not conform. In those states, HSA contributions, earnings, and distributions all get ordinary state tax treatment regardless of what happens federally. A surviving spouse in California who takes qualified medical withdrawals owes no federal tax but may still owe California income tax on them. A non-spouse beneficiary in either state owes state tax on the inherited balance in the year of death on top of the federal bill, which makes the medical-expense offset more valuable, because a dollar of offset cuts both taxes at once.