How an HSA Helps Your Estate Plan

A Health Savings Account (HSA) is a valuable tool to reduce the cost of health care. Additionally, it can also benefit an estate plan because the funds will grow on a tax-deferred basis. HSAs provide tax advantages in a way that is similar to a 401(k) or IRA plan. Pre-tax dollars fund the account, and tax-free withdrawals are allowed to pay for qualified medical expenses.

How an HSA Works

You can set up an individual HSA account or use one through your employer. You can deduct from the contributions you make to an individual HSA. With an employer-sponsored HSA, contributions can come from the employee, employer, or both.

You must include a high-deductible health plan (HDHP) with your HSA. The Internal Revenue Service defines an HDHP in 2022 as a plan with at least a $1,400 deductible for an individual or a $2,800 deductible for a family.

Total out-of-pocket costs can’t exceed $7,050 for an individual or $14,100 for a family each year. However, this limit doesn’t apply to out-of-pocket expenses for out-of-network services.

Recently, a crucial benefit of having an HDHP is being eligible for Covid-19 testing and treatment coverage before meeting the deductibles without risking your plan’s status. Additionally, participants can continue to contribute to their existing accounts if they have an HSA.

The current annual limit you can contribute to an HSA is $3,650 for individuals and $7,300 for families. You can withdraw from your plan to pay for qualified medical expenses without tax penalties.

If you enroll in Medicare or have coverage through a non-HDHP insurance carrier, such as a spouse’s plan, you’re no longer eligible to make HSA contributions. However, you might be able to contribute to the account during the eligible period before your Medicare enrollment. You could also withdraw funds from your HSA to cover eligible medical costs. When you turn 65, the list of qualified expenses expands.

HSA Benefits in Estate Planning

Like a 401(k) or IRA, the balance in an HSA will continue to grow on a tax-deferred basis. The tax consequences of an HSA inheritance will depend on the person you leave the account to, so it’s vital to consider who you designate as the beneficiary carefully.

Naming a spouse as the beneficiary allows them to treat the HSA as their own. The account will grow, and withdrawals will be tax-free to cover eligible medical bills. If you choose your child or another person as the beneficiary, the HSA will terminate, and the income tax owed will depend on the account’s fair market value.

You could name your estate as the beneficiary of the HSA. This might be a good idea if your beneficiary is in a high tax bracket and you’re in a low tax bracket. The full amount of the account will be taxed to you in the year of the death.

Contact Us

Applying for a health savings account offers a range of benefits. You should contact an estate planning lawyer today if you’re considering opening one. You can receive the legal guidance necessary to choose from various options to benefit your estate plan and beneficiaries upon your death. If you have additional questions, please contact our San Jose law firm or one of our other law firms located throughout the state of California by calling (800) 244-8814.

If you have any further questions about asset protection planning and strategies to shield your wealth, or if you’d like to have your current asset protection plan reviewed to make sure it still meets your needs, please contact us at our California asset protection office at 800-244-8814 to set up a consultation.