After an employee dies, contribution should no longer be remitted to the HCSP unless the contribution is the result of an ongoing payroll deduction.
To avoid confusion, we recommend that the employer/union include in their HCSP policy how or if money will be paid upon the death of an employee. For example, "upon an employee's death, contributions owed but not yet paid to the HCSP will be paid to the beneficiary." Or simply, "upon an employee's death, contributions can no longer be made to the HCSP."
If a contribution is remitted after an employee's death, see Contributions made in error.
Distribution of HCSP assets upon employee's death
Upon the death of an HCSP participant, the remaining account balance is always transferred to an heir to use for reimbursement of eligible health care expenses. The transfer is as follows:
If surviving spouse, balance is transferred to spouse to use for tax-free reimbursements
If no spouse, but survived by legal dependents, balance is transferred to surviving legal dependents to use for tax-free reimbursements.
If no spouse or legal dependents, balance is transferred to designated beneficiary. Reimbursements to a designated beneficiary are subject to state and federal income taxes.
If no spouse, legal dependents or designated beneficiary, a representative of the estate will name a person eligible to receive the remaining account balance in the form of reimbursements. Reimbursements to this person are subject to state and federal income taxes.
Payouts to a designated beneficiary - history
Since inception of the HCSP in 2001, changes have been made to the account balance payouts upon the death of a participant. These changes only apply to payouts to a designated beneficiary since a spouse or legal tax dependents have always been able to use the remaining account balance for reimbursements of eligible expenses upon the participant's death.
Before July 1, 2006, if no spouse or legal tax dependents, the remaining HCSP balance was transferred to an HCSP account for a non-dependent beneficiary to use for reimbursement of eligible medical expenses.
July 1, 2006 through June 30, 2009, Because the IRS did not allow reimbursements to a non-dependent beneficiary, MSRS purchased life insurance for the HCSP participant. When a participant died without a spouse or dependent, the insurance benefit representing the remaining account balance was paid to the beneficiary or estate.
Effective July 1, 2009, Section 105 was amended by H.R. 6382 to allow reimbursements to a non-dependent beneficiary for governmental plans who paid out to a non-dependent beneficiary prior to January 1, 2008. Reimbursements to a non-dependent beneficiary are subject to state and federal income tax.