When you open a health savings account (HSA), it's hard to imagine your small deposit growing into a sizable stash. But routine savings paired with investing adds up faster than you may expect. And before you know it, there could be ample funds to draw from when you need them.

Sooner or later, when it's time to tap your account, you will be grateful the money is there. You can avoid paying extra taxes by sticking to the rules and staying on top of the right forms. IRS Form 1099-SA is one of the most important ones to keep track of — here's why.

What is it used for?

As you may expect, the IRS wants to know what is going on with your HSA. Your withdrawals are of interest because of the favorable tax treatment. As long as your medical expenses are qualified, taking money out of your HSA is 100 percent tax-free. Or, if you took out money for non-qualified expenses, you will owe extra taxes and penalties.

If you are guilty of the latter, there is no hiding from the IRS. That is because when you make a withdrawal, your HSA provider sends you a copy of IRS Form 1099-SA. Box 3 — which we cover in detail below — has a special code to identify your withdrawal. By law, your provider must send your form by January 31.

Examples of when you’ll receive this form:

1. You took normal distributions from your HSA to pay for qualified medical expenses. These could be expenses for which you used your HSA debit card to pay for the medical service directly, or they could be reimbursements you received from your HSA administrator for medical expenses you paid for out of pocket.

2. You removed any excess contributions from your account. If you or your employer made contributions in excess of these amounts, you have until April 15th to remove them and all associated earnings from your account. If you don’t, you’ll have to include them in your gross taxable income and pay a 6% excise tax for every year those excess contributions stay in your account.

3. You inherited an HSA because the account-holder died. If you were the account holder’s spouse, the HSA will continue to function as an HSA. If you weren’t the account holder’s spouse, the account ceases to be an HSA and you will have to include the account’s fair market value in your gross taxable income.

4. You’ve recently become disabled. The reason for this is: if you’ve recently become disabled, you’re no longer restricted in how you use your HSA money. You can still use it for qualified medical expenses, but you can use it for other expenses as well.

5. You used your HSA money for something other than a qualified medical expense (aka a “prohibited transaction”). If you used your HSA contributions or earnings for anything other than a qualified medical expense you will have to include the distributed amount in your gross taxable income as well as pay a 20% tax penalty on said amount.

So, if you’ve only taken normal distributions that were used to pay for qualified medical expenses from your own account, you’ll receive one 1099-SA. If any of the above apply, expect a 1099-SA from the HSA administrator for each incident.

What each box means

When your form finally arrives, you may be eager to dive into filing your taxes. But it's easy to get confused by all the different boxes. Here is a basic explanation of what each one means:

Box 1: These are your total HSA distributions — either direct payments for medical expenses or reimbursements.

Box 2: If you contributed more than your annual limit and earned money on the extra amount, you will see that number here.

Box 3: The IRS has different codes for each type of distribution. You can see a breakdown of each of these from the IRS. This is the number that tells the IRS how to treat this money, so you want to make sure the code entered by your HSA administrator is accurate. The IRS distribution codes for HSAs are:

• For normal distributions for qualified medical expenses.

• For distribution of excess contributions to an account-holder.

• For distributions made to an account holder after they've become disabled.

• For distributions made to the account holder's estate in the event of account holder's death (includes spouse).

• For distributions made as part of a prohibited transaction.

• For distributions made from a deceased account holder's HSA to a non-spouse, non-estate beneficiary.

Box 4: The fair market value (FMV) of the HSA on the date the account holder died. This will only be filled in if you are receiving a 1099-SA as an HSA beneficiary.

Box 5: These checkboxes are for your provider to choose which type of account you have. The box next to HSA should be marked.

Your contact information and that of the HSA trustee or administrator should also be included on this form.

What should not be included

• Box 1 should not have a negative number.

• Box 1 should not include withdrawal of excess employer contributions and the earnings they made if said withdrawals were returned to employer.

• Box 1 should not include trustee-to-trustee transfers from this HSA to another HSA.

How to use it for your taxes

When you distribute money from your HSA, your tax return has one extra hoop to jump through: IRS Form 8889. First, your total HSA withdrawal goes on line 14a. Then, you can refer to Box 3 on IRS Form 1099-SA to see if your withdrawal was allowed. If you see code 1, you won’t owe anything extra. Code 5 is the red flag that you may owe more in taxes.

These are the two additional taxes you may owe:

• If you withdrew money for non-qualified medical expenses, you have to report it as extra income.

• You will also owe a 20 percent penalty on top of the extra taxable income. You can calculate this one line 17b of Form 8889.

Reporting an inherited HSA

Inheriting an HSA can be a welcomed event but there are a few nuances to these accounts once the account-holder dies.

• If you inherited the HSA from someone who isn’t your spouse, you will have to report the FMV of the account as of the date the account-holder died as part of your gross taxable income. This is true even if you received the money during a later year.

• Any earnings on HSA contributions after the account holder’s death are taxable and must be included under “Other Income” on your tax return.

• If the HSA is left to the account holder’s estate, the FMV of the account will be included in the account holder’s gross income for that tax year.

Tax form 1099-SA is the document that your HSA trustee or administrator sends to you and to the IRS to report the distributions made from your account. When you receive it, you should check all of the information to ensure it’s correct (you don’t want a normal distribution coded as a prohibited transaction), and then use it to complete tax form 8889.

Tips to stay organized during tax time

Collecting a pile of tax forms may not be your favorite activity, but they serve a unique purpose. If you took money from your HSA, watch the mail for IRS Form 1099-SA. The codes could reflect a tax-free distribution or owing more than you planned for. Either way, you won't be able to file without having it handy.

If you need more guidance to filing your taxes when you have an HSA, Lively has put together a comprehensive guide.