An HSA card
When an employee dies, employers and third-party administrators may be tasked with settling their health spending and dependent care accounts, each of which have their own unique compliance challenges.
Flexible spending accounts (FSAs), dependent care assistance programs (DCAPs) and health savings accounts (HSAs) are each subject to different regulations, law firm Maynard Nexen said in a recent blog. At the highest level, FSAs and DCAPs are both employer-owned accounts while HSAs are participant owned, which require different treatment, but other nuances, including potentially significant tax consequences, apply, the blog said.
Recommended For You
FSA contributions typically stop upon a participant’s death and unused funds are forfeited unless otherwise specified in the plan. Surviving spouses and dependents can only submit claims incurred prior to the date of the participant’s death during the plan’s run-out period. Claims incurred after the participant's death are only payable to surviving spouses or dependents if they are covered individuals and eligible for COBRA, said Maynard Nexen.
Unlike health FSAs, funds are not automatically forfeited in DCAPs, which allow pre-tax contributions for dependent care expenses. The participant’s spouse can file reimbursement claims through the end of the plan year in which the participant dies as long as they are seeking employment or working during the time reimbursement is sought, said the blog. There is no separate COBRA right to extend coverage beyond the year in which the participant dies.
HSA contributions do not expire upon the death of the participant, and the remaining balance is not forfeited. The HSA transfers to the surviving spouse if they are the designated beneficiary or ceases to be an HSA and becomes subject to income tax if the spouse is not the designated beneficiary. If no beneficiary is designated, the HSA becomes part of the participant’s estate.
“Employers and administrators should review plan documents to ensure death-related claims and forfeiture provisions are clearly defined and effectively communicated to the surviving beneficiaries,” said Maynard Nexen.
In addition, employers should focus on educating participants on the importance of designating beneficiaries, particularly for HSAs that are subject to significant tax consequences.
© Touchpoint Markets, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more inforrmation visit Asset & Logo Licensing.
Kristen Smithberg
Kristen Smithberg is a Colorado-based freelance writer who covers commercial real estate, insurance, benefits and retirement topics for BenefitsPRO and other industry publications.
