Health savings accounts are widely used as a tax-efficient way to set aside funds for medical expenses, combining upfront tax relief with tax-free growth and tax-free withdrawals for eligible healthcare costs.
Over time, consistent contributions and long-term investing can cause these accounts to grow into significant balances, sometimes reaching levels comparable to retirement savings vehicles.
However, the tax advantages that apply during the account holder’s lifetime do not extend uniformly after death. Instead, inheritance rules create a clear distinction between surviving spouses and all other beneficiaries.
While spouses generally continue under the same tax treatment as the original account holder, non-spouse heirs face a different outcome.
In many cases, the remaining HSA balance becomes fully taxable as ordinary income in the year it is inherited. As account values increase over decades, this tax treatment can have significant, often overlooked consequences for families and designated beneficiaries at the time of inheritance.
How HSA inheritance rules differ sharply between spouses and non-spouses
The tax treatment is straightforward when a surviving spouse inherits an HSA from a deceased account holder, because the rules are essentially identical to those that apply when you own the account yourself, CNBC reported.
The account transfer is not taxable, and the surviving spouse can continue to take tax-free distributions for qualified medical expenses, such as doctor visits and prescriptions, the report noted.
Non-spouse beneficiaries, including children, grandchildren, friends, and anyone else who is not the surviving spouse, face an entirely different outcome under the tax code.
When a non-spouse inherits an HSA, the account loses its tax-advantaged status, and the full balance becomes taxable ordinary income for the beneficiary in the year the account holder dies.
Carolyn McClanahan, a certified financial planner and founder of Life Planning Partners in Jacksonville, Florida, described this provision as the “big unknown” that most people fail to understand about health savings accounts.
Large HSA balances could push heirs into the 37% tax bracket
The tax treatment for non-spouse HSA beneficiaries is more stringent than the rules governing inherited individual retirement accounts, which generally allow a 10-year window for non-spouse heirs to empty the account and spread the tax liability, CNBC reported.
The inherited HSA tax hit is a significant problem for families that is rarely discussed in the broader financial planning community. Inheriting a large HSA as a non-spouse heir could mean getting pushed into the highest marginal tax bracket, currently 37% for 2026, in the year they inherit the account, Ryan Greiser, a CFP and co-founder of Opulus, told CNBC.
More Personal Finance:
- Fidelity has a warning for anyone who left a 401(k) at an old job
- Living trusts: what they do and who needs one
- Fidelity sounds alarm on 401(k)s, IRAs
McClanahan, a member of CNBC’s Financial Advisor Council, said one of her clients had built a $600,000 HSA balance, showing how these accounts can grow to 401(k)-like levels when owners invest consistently and avoid withdrawals over many years.
A non-spouse heir who already earns a moderate salary and then inherits a six-figure HSA balance could see their effective federal tax rate spike dramatically for that single year. This is because the entire account value is taxed on top of their existing wages, investment income, and any other taxable earnings, with no option to spread the hit across multiple filing years, as inherited IRA rules would allow.
Financial planners outline ways to reduce the inherited HSA tax hit
The good news is that account holders who recognize the problem early have several options to shrink the taxable balance their non-spouse heirs would otherwise absorb in a single tax year.
If you know you have that big an HSA, start spending it. There’s no reason for you to keep a huge HSA if you don’t have a good plan for beneficiaries
Using the HSA for qualified medical expenses during your lifetime preserves the tax-free withdrawal benefit while reducing the balance that would eventually become taxable income for heirs, McClanahan told CNBC.
Account holders can also choose to donate the HSA to charity, which generally would not owe tax on the transfer, effectively eliminating the tax burden on the remaining balance, McClanahan noted.
Spreading the inheritance among multiple beneficiaries rather than naming just one or two can also reduce the tax impact by splitting the taxable income among several individuals who may be in lower tax brackets, she explained.
Heirs can use the HSA to pay the deceased’s outstanding medical bills
Non-spouse beneficiaries have one additional strategy that can meaningfully reduce the tax bill: covering medical expenses the original account holder left unpaid at the time of death.
Beneficiaries can offset at least some of their tax liability by using the inherited HSA to cover any of the deceased’s unpaid qualified medical expenses, Michael Ruger, a certified financial planner and chief investment officer at Greenbush Financial Group, wrote in a blog post analyzing the inherited HSA rules.
Those payments must be completed within 12 months of the account holder’s death for the offset to apply, under IRS rules 969 governing inherited HSAs.
If the HSA has a value of $50,000 at the time of death and the non-spouse beneficiary uses the proceeds to pay $10,000 of the account holder’s unpaid medical bills, the beneficiary would then owe tax on the remaining $40,000, Ruger wrote in his analysis.
HSA estate planning requires the same care as IRA beneficiary decisions
The financial planners who spoke with CNBC made clear that this is not an edge case affecting a small number of account holders, because the combination of rising contribution limits and long-term investment growth is producing HSA balances large enough to trigger serious tax consequences for heirs.
Account holders who have accumulated significant balances and do not have a surviving spouse as their primary beneficiary face a direct planning choice: spend the account down on qualified medical expenses, redirect the remaining funds to charity, or prepare their heirs for a potentially steep one-time tax obligation.
For anyone treating an HSA as a long-term wealth-building vehicle, the inheritance rules deserve the same careful attention that goes into IRA beneficiary designations and 401(k) rollover decisions, because the cost of ignoring them falls entirely on the people you intended to help.
