How to Report Form 1099-SA for HSA and MSA Distributions

Receiving a Form 1099-SA signifies that you have taken a distribution from a Health Savings Account (HSA), Archer Medical Savings Account (MSA), or a Medicare Advantage MSA (MA MSA). The form’s primary purpose is to report the total amount of money you withdrew from your account during the year to both you and the IRS. This reporting is necessary to determine if any portion of your distribution is taxable. The form itself does not mean you owe taxes, but it is a required piece of information for completing your annual tax return.

Understanding Form 1099-SA

The financial institution that holds your HSA or MSA issues Form 1099-SA, sending it by January 31 of the year following the distribution. This form provides a summary of the withdrawals from your account. Several boxes on the form contain the details you will need for your tax return.

Box 1, labeled “Gross distribution,” shows the total amount of money taken out of the account during the year. This figure includes all distributions, regardless of whether they were used for qualified medical expenses or for other purposes. It represents the full withdrawal amount that must be accounted for on your tax return.

Box 2, “Earnings on excess contributions,” reports any earnings distributed with the removal of contributions that exceeded the annual limit. If you contributed more than allowed and then withdrew the excess, the earnings on that excess are reported here and are taxable. Box 3 contains a “Distribution code” that tells the IRS the circumstances of the withdrawal, such as a normal distribution or one for distributions after the account holder’s death.

Finally, Box 5 is a checkbox that indicates if the funds came from an HSA, an Archer MSA, or a Medicare Advantage MSA. This distinction is important because the specific rules and tax forms for reporting can differ depending on the account type.

Determining if Your Distribution is Taxable

The taxability of a distribution from an HSA or MSA depends on how the funds were used. If the total amount you withdrew is less than or equal to your total unreimbursed qualified medical expenses for the year, the distribution is not taxable. You are responsible for keeping records to prove your distributions were used for valid expenses, as the account custodian does not track how you spend the money.

Qualified medical expenses are defined by the IRS and include costs for the diagnosis, cure, mitigation, treatment, or prevention of disease. Common examples include payments for doctor visits, dental treatments, prescription medications, and eyeglasses. For a comprehensive list, taxpayers can refer to IRS Publication 502. Expenses for general health, like vitamins or a gym membership, do not qualify.

Using distributions for non-qualified expenses has tax consequences. The portion not used for qualified medical expenses must be included in your gross income and is subject to income tax. An additional tax also applies to this amount: 20% for HSAs and Archer MSAs, and 50% for MA MSAs.

Certain situations provide an exception to this additional tax. The penalty is waived if the distribution is made after the account holder turns 65, becomes disabled, or dies. In these cases, the distribution may still be subject to regular income tax if not used for medical costs, but the additional penalty is not applied.

Required Information and Tax Forms for Reporting

Before reporting your distributions, you must gather your Form 1099-SA and your records of qualified medical expenses paid during the year. These records, such as receipts and bills, are your proof that the funds were used for their tax-free purpose. You should also have records of any contributions you made to the account.

Information from Form 1099-SA is not entered directly onto your Form 1040 tax return. It is first reported on a separate form that calculates any taxable amount. The specific form you use depends on the account type indicated in Box 5 of your 1099-SA.

For Health Savings Account (HSA) distributions, you must complete and attach Form 8889 to your tax return. Part II of this form handles HSA distributions. You will enter the gross distribution from Box 1 of Form 1099-SA and your total qualified medical expenses paid with the distributions. The form then guides you to calculate the taxable amount by subtracting your qualified expenses from the total distribution.

If your distribution came from an Archer MSA or a Medicare Advantage MSA, you will use Form 8853. The process is similar, requiring you to report your total distributions and the amount used for qualified medical expenses to determine the taxable portion. Archer MSA distributions are reported in Section A, while MA MSA distributions are reported in Section B.

Filing Your Tax Return

After completing either Form 8889 or Form 8853, you transfer the results to your main tax return, Form 1040. The figures from these specialized forms are carried over to the appropriate schedules that accompany Form 1040.

Any taxable amount calculated from your distributions is reported as “Other income” on Schedule 1 (Form 1040). This ensures that any portion of your distribution not used for qualified medical expenses is included in your total income and taxed accordingly.

If you owe an additional tax for using funds for non-qualified expenses, that amount is also carried over from Form 8889 or Form 8853. This penalty tax is reported on Schedule 2 (Form 1040). The additional tax is then added to your total tax liability.

Keep all related documents with your tax records. This includes Form 1099-SA, your completed Form 8889 or 8853, and all receipts for the qualified medical expenses you claimed. The IRS recommends keeping tax records for at least three years from the date you filed your return.