Deferred Qualified HSA Withdrawals in the Case of Sudden Death

Question

If I defer my HSA withdrawals in order to realize the tax-free gains (as described in this post HSA withdrawals for past years?) and then suddenly die, can my estate apply receipts and receive tax-free withdrawals or does my entire HSA become subject to the "Death of HSA Holder" section of Publication 969?

Answer 1

Yes the HSA can be used to pay for prior expenses, but only if you choose your spouse or estate as the beneficiary, if I interpret the publication correctly (emphasis added):

If your spouse is the designated beneficiary of your HSA, it will be treated as your spouse’s HSA after your death.

If your spouse isn’t the designated beneficiary of your HSA: The account stops being an HSA, and the fair market value of the HSA becomes taxable to the beneficiary in the year in which you die.

If your estate is the beneficiary, the value is included on your final income tax return. The amount taxable to a beneficiary other than the estate is reduced by any qualified medical expenses for the decedent that are paid by the beneficiary within 1 year after the date of death.

Since HSA funds can be used for a live spouse's medical expenses, I presume that the HSA being inherited by a spouse could be used for the deceased spouse's prior expenses (I do not see any provision that prevents this).

I also do not see any provisions that limit how far back medical expenses can be paid - like the other answer, though, you need to make sure you have proper documentation for the expenses and that they were not already paid by the HSA, or another source, and were not deducted as medical expenses.