Tax season is upon us and if you have an HSA, there are a few forms you need to be aware of. IRS Form 1099-SA is an important one. It’s the form you will receive from your HSA administrator in January that shows the distributions you’ve received from your HSA for the given tax year. You’ll receive a 1099-SA for each distribution type you received and you’ll use this information to complete Tax Form 8889.
You'll receive a 1099-SA if:
- 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.
- You removed any excess contributions from your account. The contribution limits for 2019 were $3,500 for individual coverage and $7,000 for family. 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.
- 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.
- 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.
- 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 You'll See on Tax Form 1099-SA
- Box 1: Total gross distribution.
- Box 2: Any earnings on excess contributions in addition to any money that was received as the result of a Trustee-to-Trustee transfer from an IRA into your HSA.
- Box 3: The distribution code. 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: 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 in Your 1099-SA
- 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.
Inheriting an 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.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.