What happens to an FSA when someone dies?

Yes, an FSA is great as it'll help you save money on necessary expenses. But have you considered what would happen to your account in case of the unexpected? What happens to the money?

While thinking about death isn't a happy topic, it's a necessary one. If other people in your household rely on your FSA, or even if you want to ensure your loved ones don't have to deal with complicated estate planning issues, then it's only fair you consider them now.

Your heirs have a deadline

Just to recap, money you contribute to an FSA can only be used for qualified expenses you incur in the current plan year. But you can submit claims up to your plan's filing deadline for the following year or if you have a grace period, can continue to incur new expenses for a two and half months into the new plan year. Otherwise, the money in your account may be allowed to rollover with a cap of up to $610 (for plan years starting in 2023- increases to $640 for plan years starting in 2024) or is forfeited.

When you pass on, the above rule still applies. First, your FSA contributions stop. Until the claims filing deadline as mandated by your plan, your heirs can still file eligible expenses that you racked up before your death. That means only your expenses or those of your dependents are eligible to be claimed, and only for the expenses incurred before your death..

When you first open an FSA, the plan sponsor should technically show you to a section of your plan document where you can prepare your estate in the event of your death. This section will mention that you should get a will and any necessary documents so that you can ensure your FSA funds will be used according to your wishes in the event of your death. This includes designating any heirs and an executor of your will on what you want to do with your FSA funds.

If you pass away, any expenses that are reimbursed will still most likely be in your name. As in, your executor will need to find a way to cash the check or deposit it in an account that has your name on it.

Of course, all of the above can get complicated, so make sure you consult with a qualified professional, one that can help you with estate planning and walk you through your options.

How is this different from an HSA?

One major difference between an FSA and an HSA is that within an HSA your contributions don't expire. That means when you die, the money sitting in that account can be used indefinitely. When you open an account, you're technically able to designate a beneficiary for your HSA.

You'll need to speak with your plan sponsor and a licensed estate planning professional, but depending on who your beneficiary is, the money will be used differently.

If your spouse is the beneficiary, then he or she will receive 100% of your funds. Your spouse can use the funds for their qualified expenses as well as ones you racked up before your death. If the beneficiary isn't your spouse, then your HSA will terminate and that person will receive the fair market value of your account. He or she can also pay for your qualified medical expenses to reduce any tax burdens.

If there isn't a beneficiary, then the HSA funds will go to your estate. This will be included on your gross income and will factor into how much estate taxes will get taken out. In each of the above scenarios, your beneficiaries can inherit money, in contrast with the FSA where they can only get the money if it's to get reimbursed for expenses you incurred.

Final thoughts

Again, it's not fun to think of your untimely demise, but it's a necessary step to ensuring your wishes are carried out. Your FSA funds are no exception. Ensuring you plan for the future can help your loved ones feel less overwhelmed, and more available to deal with other pressing needs.

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