HSA Distribution for Deceased

[KC-CPA]

One of my clients dad passed away. His estate is not large enough for an estate return but will have income for a 1041 return.

In the list of his assets for his estate, in which the client is the designated representative for, there is an HSA account with a value of $60,000. The HSA has no beneficiaries noted and there is no spouse, therefore it is taxable to deceased. The problem is the year of death and year of distribution of HSA are not the same. The dad passed away in August of 2018. Money from HSA was distributed in April of 2019 (not year of death).

The distribution in 2019 was to the Estate name (used for EIN), however, the HSA trustee noted the 1099 will come in the deceased persons name social security number. So, here is my issue, Final return for deceased is year of death 2018, however, in 2019 there will be a 1099 for the HSA distribution to his social security #.

Everything I read states the distribution should have been in the year of death but it was not, it was in the following year. So, do I file an additional tax return in 2019 for deceased so it will align with the 1099 distribution?

[kathyc2]

Interesting situation. I would think it should pass through the 1041 and be taxable to beneficiaries. However, everything I find says the FMV of account at DOD should be reported on fathers final return. My opinion would be to amend father's 2018 return rather than having it on 2019 return. The 2019 1099SA should show FMV at DOD in addition to distribution. See instructions for 8889 that includes specific instructions for how to handle.

[KC-CPA]

Thank You for the response. I actually filed an extension for his 2018 return and was getting ready to file it this week without the HSA information, I will not have the 1099-SA until year end and they want to make sure they file his 2018 timely. So, along the lines you noted above, I was going to go ahead and file the 2018 and then amend it when we get the 1099-SA to make sure it all aligns with the 1099-SA, as Optum will not provide the 1099-SA information until year end.

[kathyc2]

I should be easy to obtain FMV at date of death by looking at statement.

[Dude]

I would like to see a decision where the trustee is held liable for the cost of an amended return if they do not feel obliged to follow accepted protocol (if not the law).

[Burke]

Everything I read states the distribution should have been in the year of death but it was not, it was in the following year. So, do I file an additional tax return in 2019 for deceased so it will align with the 1099 distribution?

You cannot file a personal return (1040) for a deceased person for a year subsequent to his death. The IRS will reject it. As Kathyc2 states, the value of the HSA at date of death is shown on the final tax return of the deceased if the beneficiary is not the spouse. All eligible medical expenses paid up to one year after death can be claimed against the income, which is taxable. Hopefully, all those have been paid by now and you know what they are. Any earnings after date of death in the account are reported on the 1041. IMO, the custodian should be issuing two 1099's. One for FMV at date of death, and one to the estate for any earnings after that date. If they don't, you will have to divide it properly. Talk to them again so that they understand you are dealing with two different tax years and treatment. This should also be the way they would process the 1099's if the beneficiary were an entity or someone other than a spouse. FMV at DOD goes on deceased's final return which would be 2018, and any earnings after DOD are reported and taxable to the actual payee in the year paid. I think the instructions for 8889 are confusing at best. The logical way to handle this is to include on 1041 return and deduct all eligible expenses incurred before death but paid after death on that tax return. Why it is not and what Congress was thinking is beyond me. PS: What was his date of death?

[KC-CPA]

Thank You. I got the 1099-SA, its in the estates EIN and has the value and FMV, differerence of $2,000. They used code 6 in box 3 (which I think is another error as it was to an estate)

6—Death distribution after year of death to a nonspouse beneficiary

Use this code for payments to a decedent's nonspouse beneficiary, other than an estate, after the year of death. Do not use with code 4.

So looks like I have $67k to put on final return in 2018 (even though it came in Estates EIN) and $2k earnings on the 1041 in 2019 ? His date of death was Aug 18, 2018.

[Burke]

I assume the Estate got the funds. Have any distributions been made to the heirs? If administrator elected a fiscal year, the estate return was due November 15, 2019 by my calculations. Did he file an extension?

[KC-CPA]

The intitial trust return was filed. We are filing the final one now. The estate got the distribution and it did distribution some of the funds to the heirs but not all.