What Does 1099-SA Code 1 Mean for Your Taxes?

Receiving a Form 1099-SA in the mail signifies that you have taken money out of a special health savings account. These accounts, which include Health Savings Accounts (HSAs), Archer Medical Savings Accounts (MSAs), or Medicare Advantage MSAs, are designed to help people with high-deductible health plans pay for medical costs. The purpose of this form is to report the total amount of these withdrawals, known as distributions, to both you and the Internal Revenue Service (IRS). The financial institution that manages your account is responsible for sending this form to you, typically by the end of January following the year of the distribution.

Deciphering Form 1099-SA and Code 1

Box 1 of Form 1099-SA is labeled “Gross distribution.” This figure represents the total amount of money you withdrew from your health savings account over the course of the calendar year, regardless of how you ultimately used the funds.

Box 3, “Distribution code,” tells the IRS the circumstances of your distribution. A “Code 1” in this box specifically indicates a normal distribution, meaning the withdrawal was taken under standard conditions. Seeing Code 1 does not automatically mean the distribution is tax-free; it simply classifies the withdrawal as a standard one. The tax treatment depends entirely on how the funds were spent, a detail that is not reported on the 1099-SA itself.

Tax Implications of a Code 1 Distribution

The taxability of a distribution from a health savings account depends on whether the money was used for Qualified Medical Expenses (QMEs). If every dollar of the distribution was spent on QMEs for yourself, your spouse, or your dependents, the entire amount is tax-free. You will not owe any federal income tax on the funds or be subject to any additional tax.

The IRS defines what constitutes a QME in Publication 502, “Medical and Dental Expenses.” These include payments for doctor visits, prescription medications, dental treatments, and vision care like glasses or contact lenses. The costs of medical equipment, supplies, and diagnostic services are also qualified expenses, but expenses for general health, such as vitamins or a gym membership, are not.

If any portion of the distribution was used for non-medical purposes, that amount becomes taxable. It must be reported as “other income” on your tax return and is subject to your regular income tax rate. This non-qualified portion is also subject to an additional 20% tax.

To substantiate your claims of using the funds for QMEs, you should retain all receipts, invoices, and explanations of benefits related to the medical costs you paid with your HSA funds. In the event of an IRS audit, these documents serve as the proof required to verify that your distribution was tax-free.

How to Report on Your Tax Return

You must report the distribution on your federal tax return using Form 8889, “Health Savings Accounts (HSAs).” This form is filed with your standard Form 1040 and is used to reconcile your distributions and determine if any portion is taxable.

First, transfer the gross distribution amount from Box 1 of your Form 1099-SA to Line 14a of Form 8889. On Line 15, you will enter the total amount of qualified medical expenses that you paid for with the funds from your distribution. This is the figure you must be able to substantiate with receipts.

The form then calculates the taxable portion of your distribution on Line 16. If the result is greater than zero, this taxable portion is carried over and reported on Schedule 1 of your Form 1040 as “other income.”

Should you have a taxable amount on Line 16, you may also owe the additional 20% tax. This is calculated on Line 17b of Form 8889. The resulting tax is then carried to Schedule 2 of Form 1040.