Estate Treatment Of HSAs

• If married, the spouse inheriting the HSA is treated as the owner
• If not married:
  -The account will no longer be treated as an HSA upon the death of the individual
  -The account will become taxable to the recipient of it (including the estate of the individual)
  * Taxable amount will be reduced by any qualified medical expenses incurred by the deceased individual before death and paid by the recipient of the HSA
  *The taxable amount will also be reduced by the amount of estate tax paid due to inclusion of the HSA into the deceased individual's estate
• Accounts are owned by the individual (not an employer). The individual decides:
  -Whether he or she should contribute
  -How much to use for medical expenses
  -Which medical expenses to pay from the account
  -Whether to pay for medical expenses from the account or save the account for future use
  -Which company will hold the account
  -What type of investments to grow account
• Employer cannot restrict
  -What distributions from an HSA are used for
  -Rollovers
• HSA Custodian or Trustee can put reasonable limits on accessing the money in the account
  -Frequency of distributions
  -Size of the distributions
• Who can be an HSA Trustee or Custodian?
  -Banks, credit unions
  -Insurance companies
  -Other entities that meet the IRS standards for being an IRA trustee or custodian
  
  *Entities already approved by the IRS to be an IRA or Archer MSA trustee or custodian are automatically approved to be an HSA custodian
• IRS has provided model HSA Trustee and Custodian Forms
• Trustee or custodian fees
  -Can be paid from the assets in the HSA account without being subject to tax or penalty
  -Can be directly paid by the beneficiary without being counted toward the HSA contribution limits
• HSA trustee must report all distributions annually to the individual (Form 1099 SA)
  -Trustee not required to determine whether distributions are used for medical purposes; the individual does that.
  -Individual will report on annual tax return amount of distribution used for qualified medical expenses
• No "use it or lose it rules" like Flexible Spending Arrangements (FSAs)
  -All amounts in the HSA are fully vested
  -Unspent balances in accounts remain in the account until spent
  -Encourages account holders to spend their funds more wisely on their medical care
  -Encourages account holders to shop around for the best value for their health care dollars
• Accounts can grow through investment earnings, just like an IRA
  -Same investment options and investment limitations as IRAs
  - Same restrictions on self-dealing as with IRAs
• Rollovers from Archer MSAs and other HSAs permitted
  -Only one rollover per year is permitted
  -The rollover to new HSA must be completed within 60 days
  -These restrictions follow the IRA rollover rules
• Direct trustee to trustee transfers of HSA amounts are not subject to the rollover restrictions
  -Thus, multiple trustee to trustee transfers are allowed in a single year
  -Both trustees must agree to do the transfer and they are not required to do so
  -Direct rollovers from IRAs, 401(k), 403(b) and 457 plans are not permitted

Information as of 2004