HSAs provide a tax-advantaged financial tool for reducing out-of-pocket healthcare expenses and retirement savings. However, because the funds contributed to your account are pre-tax, you must account for them on your tax returns. If you’re filing HSA tax information for the first time, you may have questions about the 1099-SA form and where you get it. You may also have questions about Form 8889 and Form 5498. Here is the information you’re looking for.
HSA Tax Forms and Filing Your Taxes
IRS Requirements
Let’s start with the basics. If you have an HSA, you must include information from two IRS forms – Form 1099-SA and Form 8889 – on your 1040 tax form.
Form 1099-SA reports the total distributions (withdrawals) from your HSA account during the taxable year. Form 8889 reports all contributions made to your account. Your employer or account custodian will provide the information needed to complete these forms. Some of this information will also be on your W-2.
You should also receive Form 5498-SA from your employer or account custodian. Form 5498-SA reports contributions made to your HSA for informational purposes only.
IRS Form 1099-SA
When you withdraw funds from your HSA, referred to as “taking a distribution,” the IRS requires the company that administers your account to report it. The company will send you Form 1099-SA, which provides a list of all HSA distributions made during the year, including those you make to yourself and any you paid directly to a healthcare provider.
Form 1099-SA is brief, and if you file taxes online or by using tax software, you may have the option to import the information directly into your 1040 file. Otherwise, you will manually enter the data. Instructions for Form 1099-SA are on the IRS website. If you file your taxes by mail, attach a copy of the form with your returns.
If Box 3 of your Form 1099-SA indicates a No. 5 distribution, that indicates you used some HSA funds for non-eligible purchases. Any amount spent for a purchase that is not HSA-eligible is considered both taxable income and an early withdrawal, making it subject to a 20% penalty on top of the usual income tax.
The amount in Box 3 on your 1099-SA will appear as “other income” on your 1040 tax form. If you use software to file your taxes, it should populate the forms automatically. The Box 3 amount also needs to be listed in Box 15 on your Form 8889 return.
Download IRS instructions for Form 1099-SA here.
IRS Form 8889
This add-on form to your 1040 tax return reports all contributions and distributions (withdrawals) associated with your HSA during the taxable year. Use this form if:
- You or anyone else made contributions to your HSA
- You made distributions (withdrawals) from your HSA
- You acquired interest in an HSA due to the death of the account beneficiary
Form 8889 helps you:
- Report all HSA contributions, including yours and those made by your employer or anyone else
- Calculate your HSA deduction
- Report distributions (withdrawals) from HSAs
- Calculate any amounts you must include in your income for tax purposes
- Identify any additional taxes you may owe
For more information, download Form 8889 instructions from the IRS website. Be sure to avoid these two common mistakes:
- Contributions – Line 2 contains the amount you contribute directly to your HSA. It’s only for contributions that DO NOT come from PRE-TAX payroll deductions. Line 9 should be the total contributions that were taken directly out of your paycheck.
- Annual Limit – Line 3 should contain your annual individual or family contribution limit. This may not be the IRS-approved annual maximum limit. Remember, you are only able to contribute while you are covered by an HSA-eligible health plan (HDHP). If you lost that coverage for part of the year, you are not eligible to contribute the standard annual maximum, only a pro-rated amount.
IRS Form 5498
This document is for information purposes only, but you should keep it with your tax return records. You do not need to enter the information on your tax forms. However, having it handy when completing Form 8889 can be helpful.
Tax Filing Deadline
Whether you e-file or send your forms by mail, the last day to file income taxes in 2024 for calendar-year filers is Monday, April 15. If you file by mail, your returns must be postmarked no later than midnight.
You can request an automatic six-month extension if you can’t file your federal tax return by the deadline. However, you must file IRS Form 4868 on or before April 15 (or your tax deadline, if you are not a calendar-year filer). Remember that if you owe taxes, you should pay them by the deadline, or interest will accrue on the unpaid amount until you pay your tax bill.
HSA Tax Considerations
Understanding how to use Form 1099-SA and Form 8889 correctly helps you avoid paying more taxes than you should or making mistakes that could result in IRS penalties. Keep the following in mind about HSAs and filing your taxes.
Contributions
- HSA account owners can maximize contributions for the previous year up to the tax filing deadline, which is April 15 in most calendar years. So if you have not maxed out your annual contributions for a given tax year, you can top them off at any time until the tax filing deadline for that year.
- HSA contributions that exceed the maximum annual limit are also considered taxable income. Learn more about current limits here.
Purchases/Withdrawals/Distributions
- Withdrawals from an HSA are tax-free as long you use the money to pay for qualified medical expenses, regardless of your age at the time of withdrawal. Eligible expenses include medical, dental, and vision expenses, like regular checkups, office visits, surgeries, diagnostic treatments, eyeglasses and contact lenses, physical therapy, psychiatric care, and more. Remember, you should keep all receipts to prove your withdrawal was for eligible purchases. Your HSA administrator, or even the IRS, may challenge the purchase eligibility, so be prepared.
- The IRS considers HSA funds spent on non-qualified healthcare expenses as taxable income, and if you are below the age of 65, these also qualify as an early withdrawal which will incur a penalty. Once you reach age 65, however, you can use HSA withdrawals for any reason without penalty, although you will still pay income taxes on the withdrawal.
Other Considerations
- Unlike a healthcare Flexible Spending Account (FSA), unused HSA balances automatically roll over in full at the end of each year. This provision allows you to accumulate tax-free funds for use later in life. One caveat is that you can only spend funds on eligible expenses that were incurred after the account’s inception. However, unlike with FSAs, you do not have to claim the expense in the same year it was incurred.
- Because HSA payments or reimbursements for qualified expenses are tax-free, the IRS does not allow you to deduct medical expenses on your return that were paid for with funds from an HSA. Also, any medical expenses paid with an HSA account can’t apply to the percentage of adjusted gross income (AGI) needed to take medical deductions.
- All earnings from funds deposited in an HSA, including interest and investment returns, are tax-exempt at the federal level. Some states do not allow deductions for HSA contributions; others tax earnings and capital gains on HSA balances over a certain annual amount. Consult with your tax advisor.
The IRS pays close attention to all financial tools enabling tax-free contributions, so complete and accurate filing is important. If you have questions about your forms or about HSAs and filing your taxes, contact your employer’s HR department or your benefits administrator. If you need assistance with tax filing, contact a tax preparation specialist.
DataPath is a leading provider of cloud-based solutions for HSA administration, including account management, debit cards, investments and banking, and is also an IRS-approved HSA non-bank custodian.
