Tag Archives: Form 8889

Who Needs to File Form 8889?

In order to take advantage of the many tax benefits of Health Savings Accounts, there is a tax reporting requirement that occurs each year. When you file your taxes via TurboTax, H&R Block, etc., you are required to report HSA information on Form 8889, the IRS tax form for HSA’s. It is a slightly annoying, overly-engineered two page tax form that is required for those with transactions in their HSA during the year. As you will see, there are multiple scenarios that can cause confusion on who needs to file this form. Hopefully we address them all and provide clarity on your situation.

HSA Transactions require Form 8889

You need to file Form 8889 for the year if transactions occurred in the HSA. What are transactions? These include:

Contributions made to HSA
Distributions from HSA
Penalties for failing testing period
You acquired HSA due to death of beneficiary

If any of those apply to your HSA this year, you need to file Form 8889 with your taxes. On the other hand, if your HSA sat idle during the year, you do not need to file Form 8889. A common example of this is you 1) no longer have HSA eligible insurance, so are not contributing to the HSA and 2) you did not make any distributions from the HSA this year. If you make distributions (or contributions) in the future, you would file the form with that tax year.

Preparing Form 8889 for family coverage

To summarize who needs to file Form 8889:

File Form 8889 for each person with a Health Savings Account that had transactions during the year.

Notice the “each person with a Health Savings Account” part. This means each person with a Health Savings Account; you know, like a bank account that exists at a financial institution. If both you and your spouse have a Health Savings Account, and you made contributions or distributions to either during the year, you each need to file separate Form 8889’s.

This is important because Form 8889 reflects the tax benefits (and penalties!) associated with the HSA itself. For a family with 2 HSA’s, the two Form 8889’s will total your combined activity for the year. For example, a $6,900 contribution limit resulted in $3,000 contributed to HSA 1 and $3,900 was contributed to HSA 2, etc. Both of these need to be reported.

Why do you need to file 2 Form 8889’s in that scenario? It is because of the magic “Line 6” split for married couples with separate HSA’s.

Spouses who have separate HSA’s and family coverage “split” the contribution limit.

This means that with family coverage and 2 HSA’s, each HSA is receiving an allocation of the HSA contribution limit. While you are allowed to make this allocation however you want (save for the 55+ catch up contribution), each HSA receives an allocation. The result is you cannot file one Form 8889 and capture the tax implications, as even “$0” needs to be reported.

Form-8889-Line-6-family-hsa-contribution-split

[Note: the Line 6 split is especially complicated. If you don’t want to read the 1+ pages of IRS instructions, have EasyForm8889.com take care of it for you.]

Below is a review of common scenarios and how Form 8889 must be filed.

1) What if my spouse and I have family coverage?

If you were on family coverage during the year, you need to file Form 8889 for each HSA that existed and had transactions. If only you have an HSA, and the full contribution limit went into it, you only need to file one Form 8889 reporting those transactions. On the other hand, if both you and your spouse have an HSA, and you split the contribution limit per Line 6, you both need to file a Form 8889.

2) What if my spouse has their own HSA?

If your spouse has their own HSA, you will need to file a Form 8889 for it. Again, this assumes transactions occurred in the HSA during the year. Alternatively, if the HSA just kind of sat there, and no contributions nor distributions occurred, you do not need to file Form 8889 for it.

3) What if my adult child has their own HSA?

A nice loophole of HSA’s is that adult children on family coverage can open their own HSA. This allows them (or you, or others) to fund a substantial amount each year. The minor downside here is they will need to file a Form 8889 for each year transactions occur. So this is an additional form to file, potentially a 3rd (or 4th!) if both spouses have an HSA.

4) What if my spouse is 55 or older?

One specific rule about the 55+ catch up contribution of $1,000 is that it must follow the person who is over 55. This means that if you are over 55, and you want to take advantage of the 55+ contribution, the $1,000 needs to go into your HSA. You cannot place your $1,000 into your partner’s HSA.

For example: say the husband is 56 years old on family coverage but the insurance and HSA are in the wife’s name. His $1,000 cannot go into her HSA. Instead, the husband needs to open his own HSA and contribute the $1,000 (and any Line 6 “split” of the family contribution limit) there.

5) What if my spouse and I are both 55 or older?

As you might guess from the previous scenario, each spouse who is over 55 needs their own HSA if they are going to take advantage of the 55+ contribution. For couples on family coverage who are both over 55, this means you need 2 HSA’s to fully maximize your contribution. This maximum would equal the family contribution limit plus $1k for spouse and $1k for other spouse. Opening the HSA should not cost you anything. It is a little annoying to file the additional Form 8889, but this is the only way to maximize your 55+ contribution for the year.

Note: If you want help preparing any of your HSA tax forms this year, please consider my service EasyForm8889.com. It asks you simple questions and fills out Form 8889 correctly for you in about 10 minutes.

HSA Non Qualified Withdrawal Tax and Penalty

This question was submitted by HSA Edge reader Adam. Feel free to send in your question today to evan@hsaedge.com.

I have had an HSA for 7 years and have a balance of $7k in the account. If I need to access this money for non medical expenses, what are the penalties I will pay? What are the income taxes, do I pay a taxes on the penalty, and how do I pay this?

Withdrawing Funds from an HSA

Contributions to Health Savings Accounts are intended to be used for qualified medical expenses. If used in this manner, they offer a triple tax advantage that saves you money by decreasing your taxes. However, life presents a lot of challenges, and sometimes you need to access and use your HSA money for other things. In IRS speak, this is called a non-qualified withdrawal, and basically means taking out HSA money for non medical use. This could be anything from a bike, to a vacation, to home appliances. The point is that you need to declare this usage of money since it isn’t abiding by the HSA rules. While the IRS let’s you get your money out, the drawback is you will owe taxes and penalties on this withdrawal.

Before taking a penalty hit, be sure to review all the ways to cash out your HSA. Perhaps you can get creative and avoid taxes and penalty.

Non Qualified Withdrawal – Tax Calculation

First up, you are going to need to pay taxes on your withdrawal. This is reasonable since the funds you contributed were tax free – you got a tax deduction when you contributed them. That tax deduction was predicated on the funds being used for medical purposes, and since that is not the case, it seems fair to pay that tax benefit back. This calculation first occurs on Line 16 of Form 8889. Here, you take you total HSA distributions (Line 14, net) and subtract qualified HSA distributions (Line 15). The result is non qualified distributions, Line 16, also called “Taxable HSA Distributions”. This amount will make its way Form 1040 and be added to income, thus increasing your taxable income for the year. This will either increase your taxes owed or reduce any tax refund.

2017 Form 8889 created using EasyForm8889.com
HSA-Form-8889-Taxable-Distribution-penalty

The actual amount of income taxes you will pay is determined by your marginal tax bracket. The US income tax system is progressive meaning it consists of increasing tax rates in brackets, which are ranges of income amounts. The result is each additional dollar you earn is taxed at your highest rate. For example, if you make a non qualified distribution of $1,000 and are in the 25% tax bracket, you show that extra $1,000 as income and will owe taxes of $250. Note that this marginal tax rate differs from your average tax rate for the year, which is a weighted average of your income in various tax brackets.

Non Qualified Withdrawal – Penalty Calculation

After the taxes, the bad stuff starts happening. Most unfortunately, the IRS penalizes non-qualified withdrawals a whopping 20%. This means that besides taxes, for every $1,000 you take out of your HSA for non medical expenses, you will owe a fee of $200. That is an expensive price to pay to get your money, but sometimes it is worth it.

Back on Form 8889, Line 17b multiplies that “Taxable HSA Distribution” amount by 0.2, i.e. 20%. The result is the amount of penalty you will have to pay to the IRS. This amount makes its way to Form 1040 Line 62 where it is added as a penalty in the form of an additional amount due for the year.

The good news is you do not pay taxes on the penalty amount. As you can see above, the tax amount was calculated and then the penalty amount was determined. Said another way, the penalty calculation is a function of the taxes due, not the other way around. In terms of when this payment must occur, note that all HSA penalties and taxes are payable when you file taxes in the year the non-qualified distribution occurs. This is almost always in the future, so you have until April of the following year to find that tax and penalty amount and pay it to the tax man.

Note: if you have non qualified withdrawals this year, please consider using my service EasyForm8889.com to help complete Form 8889. It is fast and painless, no matter how complicated your HSA situation.

HSA Employer Contributions on W2 Box 12 “W”

Come tax time when you need to file Form 8889, you may be wondering how to find your contributions to your HSA. We know that you should be receiving Form 5498-SA from your HSA custodian that outlines the total contributions that went into your HSA during the year. However, this form is a lump sum total: it does not break out employer (no tax impact) vs. employee (tax deductible contributions); it just shows how much went into the account that year. Also remember that form 5498-SA may be missing prior year contributions made in the current year.

So how can you figure out your employer contributions that were made? How can you use this information to complete Line 3 and Line 9 of Form 8889?

A word about Cafeteria Plans

For one, let’s clarify that cafeteria plan contributions are counted as employer contributions. Cafeteria plans are when your employer withholds your contributions which they send to the HSA custodian for you. So these are employee contributions but your employer is doing the work for you. The benefit of cafeteria plans is that they are already pre-tax; not just income tax, but medicare / social security / other tax. So you save the taxes up front and get them deposited automatically into

You will see that for both the W2 and Form 8889, cafeteria plan contributions function just like employer contributions, not employee contributions.

Employer vs. Employee Contributions on W2

When you receive your W2 at year end, you will have a Box 12 marked with “W” and your employer contributions for the year. As mentioned, this amount will contain:

Amounts your employer contributed to your HSA
Amounts you contributed to your HSA through your employer via a cafeteria plan

Here is what Form W2 looks like for 2018 with HSA contriibutions:

HSA-employer-contributions-W2-example

So this box indicates any employer contributions for the fiscal year. Note that this box will not contain any prior year contributions – these will need to be added to the amount. If your employer pays a bonus or end of year contribution into your HSA that occurs in the following year, be sure to add that in.

Around the same time you will receive Form 5498-SA from your custodian. It will detail the total contributions made to your HSA. Again, be sure to add any prior year contributions before filing Form 8889. Using this and your W2, you can calculate the employee contributions to your HSA.

Employee Contributions equal contributions on Form 5498-SA minus those on your W2 Box 12 “W”

What this is saying is, “Total HSA contributions – Employer Contributions = Employee Contributions.” Using these two documents, you can back out and determine your contribution amount.

Alternatively, you may be able to access your HSA custodian’s website to see a breakdown of employee vs employer contributions. But it is always best to confirm with the official documentation in case you need to correct anything.

Impact on Form 8889

Now that we know the difference between employee and employer contributions, you need to handle them correctly on IRS tax form 8889 for Health Savings Accounts. You will report your (post-tax) employee contributions on Line 2, and employer (including cafeteria plan) contributions on Line 9.

Note: if you need help accounting for your HSA contributions, please consider my service EasyForm8889.com to complete Form 8889. It asks simple questions in a straightforward way and will generate your HSA tax form in 10 minutes. It is fast and painless, no matter how complicated your HSA situation.