Non-Spouse Inherited HSA: Taxes, Reporting, and Reductions

If you inherit a Health Savings Account from someone who wasn’t your spouse, the tax rules for a non-spouse HSA beneficiary are unforgiving: the account stops being an HSA the day the original owner dies, and the full fair market value on that date becomes ordinary taxable income on your return for that year. ¹ You cannot roll it into your own HSA, you cannot stretch it over years, and you cannot leave it invested with its old tax shelter. What you can do is shrink the taxable number a little, report it correctly, and brace for a few knock-on effects that aren’t obvious on the tax return itself.

How the Taxable Amount Is Calculated

The IRS treats spouses and non-spouses very differently. A surviving spouse simply takes the HSA over and keeps every tax advantage. Anyone else — child, sibling, parent, friend, domestic partner — gets the account collapsed into income. ¹

The number that matters is the fair market value of the account on the date of death. That amount goes on your return for the tax year the account holder died, regardless of when the custodian actually cuts you a check. ² It is taxed at your ordinary income rates. A $50,000 inherited balance can easily push a single filer into a higher bracket; the 2026 brackets for single filers start at 10 percent and climb to 37 percent above $640,600.

One piece of good news inside the bad: the 20 percent additional tax that normally applies to non-medical HSA withdrawals before age 65 does not apply here. ¹ You owe income tax, not a penalty.

If the account holds investments and those investments gain value between the date of death and the day the custodian liquidates, those post-death earnings are separately taxable to you as ordinary income when distributed. Losses in that window reduce what you actually receive but don’t reduce the taxable amount, which is locked in at the date-of-death value.

Two Ways to Reduce What You Owe

The statute gives non-spouse beneficiaries a narrow but real offset. You can subtract qualified medical expenses that the deceased incurred before death, provided you pay them within one year of the date of death. ¹ If the person who died left $8,000 in unpaid hospital bills and you settle them within twelve months, your reported income drops by $8,000. Keep the invoices and proof of payment. This is the only mechanism that directly reduces the taxable amount on your return.

The second relief applies only if the HSA balance was also included in the deceased’s gross estate for federal estate tax purposes. In that case, you can claim an income tax deduction under Section 691(c) for the portion of estate tax attributable to that income. ¹ Most estates don’t hit the federal estate tax threshold, so this rarely comes into play, but when it does it prevents the same dollars from being fully taxed twice.

When the Estate Is the Beneficiary

If the account holder named their estate as beneficiary, or named no one and the account defaulted to the estate, the mechanics shift. The fair market value gets reported on the deceased’s final income tax return, not yours. ² The tax comes out of estate assets before heirs are paid, reducing what’s left to distribute.

The medical-expense offset is not available in this route. That reduction is written for individual non-spouse beneficiaries, not estates. ¹ If there were unpaid medical bills, naming a person as beneficiary (rather than the estate) preserves the option to pay them and shrink the taxable number.

Reporting on Your Return

The custodian will send you and the IRS a Form 1099-SA. ³ Three boxes matter:

Box 1 shows the total distributed.
Box 3 carries a distribution code. Code 4 signals a distribution to a decedent’s estate or one made in the year of death; code 6 signals a distribution to a non-spouse beneficiary after the year of death.³
Box 4 shows the fair market value on the date of death. That is the figure driving your tax.⁴

You report the inheritance on your Form 1040 by attaching Form 8889. Write “Death of HSA account beneficiary” across the top of the form and skip Part I. In Part II, line 14a takes the Box 4 fair market value, and line 15 takes any qualified medical expenses of the deceased that you paid within the one-year window. The difference flows to your Form 1040 through Schedule 1 as taxable income. ⁵

File Form 8889 for the tax year the account holder died, even if the custodian didn’t distribute the money until the following year. If you later find and pay additional qualifying medical bills of the deceased within the one-year window, you can file Form 1040-X to amend and reduce the previously reported income.

Ripple Effects on Medicare and Marketplace Coverage

The income spike can reach beyond your tax bill. Medicare’s income-related monthly adjustment amount (IRMAA) looks at modified adjusted gross income from two years earlier. An HSA inherited in 2026 lands on your 2026 return and drives your 2028 Medicare Part B and Part D premiums. For single filers in 2026, IRMAA surcharges begin above $109,000 of income and step up from there.

A one-time inheritance is not on the list of life-changing events that the Social Security Administration will accept on Form SSA-44 to reduce IRMAA. The qualifying events are things like marriage, divorce, death of a spouse, work stoppage, or loss of pension income. ⁶ Inheriting an HSA doesn’t qualify, so higher Medicare premiums for the affected year are effectively locked in.

If you buy coverage through the ACA marketplace, the inherited HSA income counts toward household income for the premium tax credit. ⁷ For 2026 coverage, income above 400 percent of the federal poverty level ends premium tax credit eligibility. Even a modest inherited balance can put you over that line, potentially leaving you responsible for the full unsubsidized premium and any advance credits you already received.

State Income Tax

Most states track federal treatment, so the inherited amount flows onto your state return the same way. California and New Jersey do not recognize the HSA tax shelter at all, which means residents there already pay state tax on contributions and earnings during the owner’s lifetime and now face state tax on the inherited distribution as well. States without an income tax have no state impact. Confirm your state’s rules before filing.

Planning Before Death Matters More Than After

Once the account holder dies with a non-spouse beneficiary named, most of the tax outcome is fixed. The useful planning happens earlier.

If a spouse is a realistic beneficiary, naming them preserves the full HSA tax shelter after death.¹
Spending the HSA down during life on qualified medical expenses removes dollars from the eventual taxable inheritance. Every dollar spent tax-free during life is a dollar the beneficiary won’t pay ordinary income tax on.
Keep organized records of any unpaid medical bills so a non-spouse beneficiary can use them within the one-year window to reduce the taxable amount.
Match the beneficiary to the asset. If you’re dividing an estate among several people, sending the HSA to a lower-bracket heir and higher-basis or tax-favored assets to higher-bracket heirs cuts the family’s total tax.

There is no stretch option, no Roth-style tax-free path, and no way to spread the income over multiple years. The whole balance lands in one tax year for one non-spouse beneficiary, which is why the choices made while the account still belongs to its owner carry more weight than anything that can be done after.

1
Office of the Law Revision Counsel. 26 USC 223 – Health Savings Accounts
2
Internal Revenue Service. Publication 969 – Health Savings Accounts and Other Tax-Favored Health Plans
3
Internal Revenue Service. Instructions for Forms 1099-SA and 5498-SA
4
Internal Revenue Service. Form 1099-SA – Distributions From an HSA, Archer MSA, or Medicare Advantage MSA
5
Internal Revenue Service. Instructions for Form 8889
6
Social Security Administration. Medicare Income-Related Monthly Adjustment Amount – Life-Changing Event
7
Internal Revenue Service. Questions and Answers on the Premium Tax Credit