Retirement Weekly: My husband died and his HSA funds were sent to me. Do I have to pay taxes on it?

I found a Health Savings Account in which I contacted the HSA Bank and after many emails and documents, they sent me a check made out to me for the amount in his account. Is this my personal money? If the money is to be deposited in the estate’s account but the HSA Bank sends me a 1099, will I still have to pay the taxes as if the money was given to me for my personal use? 

Dear reader,

First, I am sorry to hear of your husband’s passing.

Since the check was made payable to you, that suggests your husband named you as beneficiary. If that is the case, the estate is not a party to these funds.

Spousal beneficiaries of a Health Savings Account (HSA) are typically given two options:

1. Become owner of the HSA. No taxes are due upon the change. You would then be able to tap the account to cover any qualifying, unreimbursed medical expenses you incur tax-free. In addition, if you have HSA qualifying health insurance, you would be able to add to the account on a pretax basis. You could also transfer these funds tax-free to another HSA account provider or consolidate the funds into other HSA accounts you may own.
2. Get a check for the balance of the account. This is a taxable event and you would report the income on your Form 1040.

So, first thing to check on is what the paperwork you submitted said to do. If that paperwork says to distribute the funds to you, those funds are taxable income to you but you may be able to reduce the taxable amount. If you have receipts of qualifying, unreimbursed medical expenses your husband incurred since the HSA account has been open and before he passed, you can reduce the taxable income by those expenditures.

If the paperwork indicates, you opted to take over ownership of the account and did not request a distribution, they should not have distributed the funds to you and you may be able to return the check and re-establish the account as your HSA because they didn’t follow instructions.

You said there were a lot of emails and documents involved. It could be that the paperwork led to the HSA being transferred to you and then a check was cut subsequently to that transfer. If that is the case, you would only have a short period of time to deposit the money in another HSA account in your name and avoid tax. That is called a “60-day rollover” because you must make that deposit within 60 days of receipt. When this is done, you would then be back in position 1 above.

You will need to confer with your tax adviser on what expenses qualify, if this can be rolled over, and all the other details that apply to HSA accounts. Again, I am sorry for your loss.

If you have a question for Dan, please email him with ‘MarketWatch Q&A’ on the subject line. 

Dan Moisand is a financial planner at Moisand Fitzgerald Tamayo serving clients nationwide from offices in Orlando, Melbourne, and Tampa Florida. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some reader questions are edited to aid the presentation of the subject matter.