If you have a Health Savings Account (HSA), you may have questions about how they affect your annual tax return. HSAs provide a tax-advantaged financial tool for reducing out-of-pocket healthcare expenses and saving for retirement. However, because the money contributed to your account is pre-tax, it must be accounted for on your tax returns. If you’re filing HSA tax information for the first time, you may ask, “What is the 1099-SA form, and where do I get it? What is the HSA Form 8889? What is Form 5498 used for?” Fortunately, all of these forms are relatively simple, and we have the answers to your questions below.
HSA Tax Forms and Filing Your Taxes
Let’s start with the basics. If you have an HSA, you need to 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) made 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 be on your W-2 as well.
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 company that administers your account is required by the IRS 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 as well as any you made directly to a healthcare provider in the form of payment.
Form 1099-SA is brief. When filing taxes online or with software, you can probably import the information directly into your 1040 file. Otherwise, it only takes a few minutes to type in the data. You can find instructions for Form 1099-SA on the IRS website. If you file your taxes by postal mail, attach a copy of the form with your returns.
If Box 3 of your Form 1099-SA indicates a No. 5 distribution, you used some of your funds for non-eligible purchases. Any amount spent on purchases of products or services that are not HSA-eligible is subject to a 20% excise tax 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 complete your return, 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 allows you to:
- 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.
IRS Form 5498
This document is for information purposes only. Keep it with your tax return records. You do not need to enter the information on your tax forms. However, it can be helpful to have close at hand when completing Form 8889.
Whether you e-file or send your forms by mail, the last day to file income taxes in 2023 for calendar-year filers is Monday, April 17; if you file by mail, your returns must be postmarked no later than midnight.
If you can’t file your federal tax return by the deadline, you can request an automatic six-month extension. However, you will need to file IRS Form 4868 before the tax-filing deadline. Keep in mind that if you owe taxes, you should go ahead and pay them by the deadline, or interest will be added to the unpaid tax amount until you file and pay your tax bill.
HSA Tax Considerations
Understanding how to correctly use Form 1099-SA and Form 8889 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:
- Withdrawals from an HSA are tax-free as long you use the money to pay for qualified medical expenses, regardless of age. Eligible expenses include medical, dental, and vision expenses, including regular checkups, office visits, surgeries, diagnostic treatments, eyeglasses, and contact lenses, physical therapy, psychiatric care, and much more. Remember, you should keep all of your receipts to prove your withdrawal was for eligible purchases. Your HSA administrator, or even the IRS, may challenge the purchase eligibility, so be prepared.
- HSA money spent on non-qualified healthcare expenses is considered taxable income by the IRS. Once you reach age 65, however, you can use HSA withdrawals for any reason without penalty on the distribution.
- Contributions to your HSA that exceed the maximum annual limit are also considered taxable income. The limit for 2022 is $3,650 for individuals and $7,300 for families; for 2023, it’s $3,850 for individuals and $7,750 for families.
- Money held inside an HSA can be withdrawn at any time for medical expenses. Unlike a healthcare Flexible Spending Account (FSA), unused contributions automatically roll over in full at the end of each year. This allows you to accumulate tax-free income for use later in life. One caveat is that eligible expenses must have been incurred after the account was opened, but 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 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, and some states tax earnings and capital gains on HSA balances over a certain annual amount.
Tax Filing Deadline
Tax Day tends to fall on or around April 15 in normal years (April 17 in 2023 since the 15th is a Saturday). HSA account owners are allowed to maximize contributions for the previous year, all the way up to the tax filing deadline.
The IRS pays close attention to all financial tools that enable tax-free contributions, so it’s important to file correctly. 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.