Do You Have to File Your HSA on Taxes?

Health Savings Accounts (HSAs) offer a valuable way to manage healthcare costs while providing notable tax benefits. If you contributed to or received distributions from an HSA during the tax year, reporting this activity to the Internal Revenue Service (IRS) is generally required.

Gathering Your HSA Tax Information

Accurate tax reporting for your Health Savings Account begins with collecting the necessary documentation.

Your HSA trustee or custodian will issue Form 5498-SA, “HSA Information.” This document reports the total contributions made to your HSA, including those from you and your employer, for the tax year. It also indicates the fair market value of your account at year-end. This form is typically sent to you by May 31st of the following year, after the tax filing deadline, as it accounts for contributions made up to the tax deadline for the prior year.

Employer contributions to your HSA, along with any pre-tax contributions you made through payroll deductions, are reported on your Form W-2, “Wage and Tax Statement.” You will find this amount in Box 12, identified with Code W. This specific code helps differentiate HSA contributions from other types of compensation or benefits.

For any money withdrawn from your HSA, you will receive Form 1099-SA, “Distributions From an HSA.” This form details all distributions made from your account during the year. It specifies the total amount distributed and the type of distribution, which is essential for determining the tax treatment of these withdrawals.

Reporting HSA Contributions

Understanding how Health Savings Account contributions are treated for tax purposes is essential for proper reporting. Contributions can originate from various sources, each with specific reporting nuances. Proper accounting of these amounts ensures you receive the appropriate deductions or exclusions from income.

Employer contributions to your HSA are generally made on a pre-tax basis and are excluded from your gross income. These amounts are included in Box 12 of your Form W-2 with Code W, reflecting their tax-advantaged nature. This means you do not pay federal income tax on these employer-provided funds.

Employee contributions made through payroll deductions are also considered pre-tax and are included in the Box 12, Code W amount on your W-2. If you make direct contributions to your HSA outside of payroll deductions, these are considered after-tax contributions. However, these direct contributions are tax-deductible as an “above-the-line” deduction, meaning they reduce your taxable income regardless of whether you itemize deductions.

Contributing more than the annual limit to your HSA results in an excess contribution. These excess amounts are not tax-deductible and are subject to a 6% excise tax for each year they remain in the account. This penalty applies until the excess funds are removed or absorbed by future contributions. It is important to monitor your contributions, especially if you change employers or coverage types during the year, to avoid exceeding these limits.

Rollovers and transfers of HSA funds from another HSA or even a traditional or Roth IRA are generally tax-free events. While these transactions do not count towards your annual contribution limits, they must still be reported. A direct trustee-to-trustee transfer, where funds move directly between HSA providers, is not typically reported as a distribution on Form 8889. However, if you receive the funds yourself in a rollover, you must re-deposit them into another HSA within 60 days to avoid tax consequences and potential penalties.

Reporting HSA Distributions

The tax treatment of these withdrawals depends entirely on how the funds are used. Maintaining clear records is essential to demonstrate that distributions were used for qualified medical expenses.

Distributions used to pay for qualified medical expenses are tax-free. Qualified medical expenses encompass a broad range of healthcare costs, including medical, dental, and vision care, prescription drugs, and certain insurance premiums like COBRA, long-term care insurance, or Medicare premiums. Beyond these official tax forms, maintaining meticulous personal records of all medical expenses paid with HSA funds is important. These records, such as receipts, serve as proof that distributions were used for qualified medical expenses, which is necessary for tax-free withdrawals.

Distributions not used for qualified medical expenses are considered non-qualified distributions. These amounts are generally taxable as ordinary income. The IRS views these withdrawals similarly to regular income, and they will be added to your gross income for the tax year.

In addition to being taxable, non-qualified distributions are typically subject to an additional 20% penalty tax if the account holder is under age 65, disabled, or not covered by Medicare. This penalty is designed to discourage the use of HSA funds for non-medical purposes before retirement age. However, this 20% penalty is waived if the distribution occurs after the account holder reaches age 65, becomes disabled, or upon death, though the funds may still be subject to ordinary income tax if not used for qualified medical expenses.

Upon the death of an HSA account holder, the funds are treated differently based on the beneficiary. If the surviving spouse is the beneficiary, the HSA generally becomes their HSA, retaining its tax-advantaged status. For non-spouse beneficiaries, the fair market value of the HSA on the date of death is typically included in their gross income, although some exceptions apply for qualified medical expenses paid within a year of death.

Completing IRS Form 8889

Completing IRS Form 8889, “Health Savings Accounts (HSAs),” is a required step for anyone who contributed to or received distributions from an HSA during the tax year. You must attach Form 8889 to your Form 1040, Form 1040-SR, or Form 1040-NR when filing your federal income tax return.

You can obtain Form 8889 directly from the IRS website or through tax preparation software. The form is divided into several parts to systematically report your HSA activity. Ensure you have your Form W-2, Form 1099-SA, and Form 5498-SA ready, as information from these documents will be transferred to Form 8889.

Part I of Form 8889 focuses on your HSA contributions and the calculation of your deduction. You will enter your total contributions, which include amounts from Box 12, Code W of your W-2 (employer contributions and pre-tax payroll deductions), and any direct contributions you made. The form guides you through calculating your maximum contribution limit based on your high-deductible health plan (HDHP) coverage and age. This section then determines the amount you can deduct on your tax return, which is an “above-the-line” deduction.

Part II addresses HSA distributions. Here, you will report the total amount of money withdrawn from your HSA, as indicated on your Form 1099-SA. You will then specify the portion of these distributions that was used for qualified medical expenses. The form calculates any taxable amount of distributions and applies the 20% penalty if non-qualified distributions were taken by an individual under age 65, unless an exception applies.

Part III of Form 8889 typically applies to specific situations, such as reporting the fair market value of an HSA acquired due to the death of the account beneficiary or certain funding distributions. While this section may not apply to every taxpayer, it is important to review it. The final calculated deduction from Part I or any taxable income from Part II of Form 8889 is then transferred to the appropriate lines on your main Form 1040, impacting your overall tax liability.