You have an inherited HSA. The FMV (fair market value) of the HSA on the date of death is taxable to you. (Well, I see 8889-S, so I guess it's your spouse).
However, over the next 12 months after the date of death, the recipient of the HSA funds (you) are able to exclude any amounts that you paid to cover the decedent's medical bills that were incurred before death.
In the course of the HSA, you will indicate that you inherited your HSA. You will see a screen entitled "Tell us about your inherited HSA". On this screen, it asks for (1) Qualified Medical Expenses and (2) HSA Account Value.
If line 2 is larger than line 1, you will get this error: "Qualified medical expenses should not exceed the FMV of inherited HSA assets".
This may be because you entered the FMV on December 31, 2017 (as the instructions say) instead of the FMV on the date of death (which is what the expenses should be compared to).
So, first, know that you shouldn't report expenses larger than the value of the HSA on the date of death. Second, if the expenses are larger than the FMV on 12/31/2017, then enter the FMV on the date of death instead.
This is what you want for a result: that the difference between the FMV on the date of death and those expenses paid for the decedent's medical bills incurred before death should appear as Other Income on line 21 of the 1040 - of course, if the difference is zero, then nothing will go to line 21.
