Tag Archives: Record Keeping

What is HSA Form 1099-SA?

Form 1099-SA Overview

Form 1099-SA is a form that your HSA custodian is required to file and send you each year you make distributions from your Health Savings Account. Its job is to quantify the monies that have left your HSA during the year, otherwise known as HSA distributions. There are many reasons that HSA distributions occur, including paying for qualified medical expenses, reimbursing yourself for previously paid qualified medical expenses, and cashing out your HSA. Your HSA custodian (bank) provides you this information in an official format so that the government knows the “official” figure when you go to file HSA tax Form 8889 for a given tax year. Form 1099-SA is a control to see money leaving the account, and Form 8889 verifies is was spent correctly.

An example of HSA Form 1099-SA for 2016
hsa-form-1099-sa-for-2016

Form 1099-SA Instructions

There are basically two parts of Form 1099-SA that you will see. The left hand side contains trustee (bank) and account holder information, while the right hand side includes multiple pieces of information about the distribution, its classification, amount, and tax treatment. This information is contained in Form 1099-SA boxes that we will cover here.

Box 1 Gross Distributions
This box represents the total amount of the distribution, but does not include earnings (see Box 2). Basically the total amount that came out of the HSA for a given distribution code (see Box 3). This section does not include withdrawal of excess employer contributions (and earnings) or excess MA MSA contributions, if this applies.
Box 2 Earnings on Excess Contributions
This box only applies if you have Excess Contributions to your HSA, and it shows the total earnings on excess contributions that were returned (distributed) before the tax return due date. It calls out these “special” (read: taxable) earnings that only occurred because excess contributions were sitting in your HSA.
Box 3 Distribution Codes
Form 1099-SA has a section in Box 3 that labels the type of distribution being reported. See the next section called “Box 3 Distribution Codes” to understand the codes found here.
Box 4 FMV on Date of Death
If the account holder has died, the fair market value of the account is entered on the date of death.
Box 5 Checkbox
This is a simple checkbox to indicate whether the distribution is from an HSA, Archer MSA, or MA MSA.

Box 3 Distribution Codes

Form 1099-SA has a coding scheme on Box 3 that describes the type of distribution being recorded on the form. There are six types of distribution codes that are described below. Note that you may receive multiple Form 1099-SA’s with different distribution codes. This is so they can clearly delineate different tax treatment of distributions and handle them separately.

Normal Distributions – normal distributions for the account holder (e.g. reimbursing previously paid expenses) or direct payments to a medical service provider. Used if no other code applies – basically if you take money out and don’t flag it as one of the other codes, they will code it this way.
Excess Contributions – if you are removing Excess Contributions from your HSA, it will be coded as a 2. For example, if your contribution limit for 2016 is $3,400 and you contribute $4,000, you can remove $600 before you file your tax return free of penalty. This $600 will be flagged as a 2 here.
Disability – this code flags distributions after the account holder became disabled. This involves alerting your HSA custodian that you have become disabled, and ties into line 17a on Form 8889.
Death Distribution (other than code 6) – this is used for payments to a decedent’s estate in the year of death. It also codes payments to an estate after the year of death. See the instructions for more details.
Prohibited Transaction – codes transactions per IRS sections 220(e)(2) and 223(e)(2). Basically transactions should not have occurred or are in error.
Death Distribution after year of death to nonspouse beneficiary – this is for payments to a nonspouse beneficiary, other than an estate, after the year of death. There are special HSA considerations for the year after an account holder dies. This code is basically a full taxable flag to remove the funds as non HSA (going forward).

HSA Form 1099-SA – Examples

The below images show what a completed Form 1099-SA might look like from your HSA custodian. You can expect to receive this in the first few months of the new year, before your taxes are due. Some HSA banks send the form electronically so keep an eye on your email or check your bank documents within your account.

Here is an example of the most common distribution code 1 – a normal distribution used to purchase a qualified medical expense:

hsa-form-1099-sa-completed-normal-distribution-2016

And here is an example of what an Excess Contribution might look like on Form 1099-SA:

hsa-form-1099-sa-completed-excess-contribution-for-2016

HSA Transfers avoided on Form 1099-SA

You will not see trustee to trustee transfers for your HSA. This also includes transfers from an MSA to an HSA, and vice versa. A trustee to trustee transfer occurs when your bank transfers HSA funds directly to another bank which also holds an HSA for you. You do not receive a check, and these amounts are not included as contributions or rollovers. Basically you are just transferring money between HSA accounts so nothing to report. See the difference between HSA Rollovers and Qualified HSA Funding Distributions.

Mistaken Distributions on Form 1099-SA

It may occur that you accidentally or mistakenly distribute from your HSA when you shouldn’t have. Most often money is transferred out of your HSA for a reasonable reason that turns out to be in error. Luckily, the IRS allows you to pay back an incorrect HSA distribution without penalty. You want to correct the situation that year as otherwise, you will incur penalties and taxes on the mistaken distribution. Per the IRS Instructions for Form 1099-SA:

If amounts were distributed during the year from an HSA because of a mistake of fact due to reasonable cause, the account beneficiary may repay the mistaken distribution no later than April 15 following the first year the account beneficiary knew or should have known the distribution was a mistake.

For example, if $1000 is mistakenly distributed from your HSA, and you had $0 spending on HSA’s this year, Line 16 of Form 8889 will show a positive $1000 which will be taxed and penalized. This is because without a qualified medical expense to offset it, the distribution is treated as a non qualified distribution. Instead, you can inform your HSA custodian before April 15th of the following year, and pay the distribution back. This might occur if you thought an expense was qualified but is not. In this case the withdrawal is not taxed or penalized, and paying it back is not treated as a contribution (or excess contribution) on Form 5498-SA.

Death of Account Beneficiary

There is quite a few different scenarios that can occur at the death of an HSA account beneficiary. Basically, if a spouse inherits the HSA, it continues being an HSA in their name. Otherwise, the HSA is liquidated and ceases to be an HSA. Much of this is outside the scope of this article but please the IRS Instructions (pdf) for Form 1099-SA for more information.

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Note: if you are struggling with HSA taxes, please consider using my service EasyForm8889.com to complete Form 8889. It is fast and painless, no matter how complicated your HSA situation.

Health Savings Account Rules You Should Know

This post provides a summary of the main rules for HSA’s, for both their creation and use. Following these rules, you can understand 90% of what HSA’s are all about and avoid major pain points. Of course, due to the complicated nature of the IRS there exist corner cases you may encounter based on your situation, for which hopefully this site is a good resource.

Rule #1: You must have qualifying health insurance

You can only open a health savings account if you have a High Deductible Health Plan (HDHP). This is an IRS tax guideline, the definition of which changes each year based on inflation and other adjustments. Basically what this means is that HSA’s are an advantage only allowed to a certain subset of health insurance accounts that fall under the HDHP umbrella.

For 2017, the requirements that define HDHP insurance are below. Thus to open an HSA, your health insurance must conform to the following:

Self Only Coverage	2016	2017
Maximum annual deductible for HDHP	$1,300	$1,300
Maximum annual out of pocket limit for HDHP	$6,550	$6,550
Maximum annual HSA contribution	$3,350	$3,400
Family Coverage
Maximum annual deductible for HDHP	$2,600	$2,600
Maximum annual out of pocket limit for HDHP	$13,100	$13,100
Maximum annual HSA contribution	$6,750	$6,750

Note: besides having HSA eligible insurance, there are 3 other requirements for opening an HSA that you should be aware of but we not be covered here: 1) you cannot be enrolled in Medicare, 2) cannot be claimed as a dependent on someone else’s tax return, 3) do not have any other health insurance.

Rule #2: You must open a Health Savings Account

You must actually apply for an open an HSA account from the banking institution of your choice. Perhaps your employer helps you do this, or perhaps you open the HSA yourself. Either way, the Health Savings Account must be open before you can any expenses incurred qualify for payment from (future) HSA funds. Per IRS form 969 (2015 PDF):

You can (only) receive tax-free distributions from your HSA to pay or be reimbursed for qualified medical expenses you incur after you establish the HSA.

So the actual HSA contributions do not need to be in your account, but any medical costs you incur before opening the account are not qualified and cannot be paid with (tax free) HSA dollars.

Rule #3: Know your HSA contribution limit for the year

There is a maximum amount you can contribute to your HSA each year called your contribution limit. This amount varies based on a number of factors that may apply to your situation. The simple case is if you had health insurance all year, the contribution limit for 2017 for self only insurance is $3,400 and for family insurance is $6,750. If you are 55 or older, you can add an additional $1,000 to that. If you are married and both have HSA’s, you have to share the $6,750.

If you had partial year coverage, more complicated rules apply. Generally a pro rata (by month) allocation of the contribution limit for your insurance occurs. If you began HSA coverage this year, you may take advantage of the Last Month Rule. This optionally allows you to contribute up to the contribution limit for the year, even if you had partial year coverage. However, do so with caution: if you fail to maintain the Testing Period, these contributions will be considered excessive and taxes and penalties attached.

Rule #4: Spend your HSA only on Qualified Medical Expenses

In order to receive tax benefits of HSA’s, you must play by the IRS’s rules regarding how they are spent. They detail these as Qualified Medical Expenses which include a wide variety of medical items such as prescription drugs, copay’s, doctor’s visits, dental work, eye care, child care, surgeries, tests, hospital fees, acupuncture, etc. For HSA contributions to be spent tax free, they must be spent on qualified medical expenses. If HSA funds are spent on anything other than qualified medical expenses, they will be taxed and penalized.

This tax/penalty calculation occurs when you file HSA tax Form 8889 for your yearly taxes, as you will be asked two questions regarding your HSA.

How much was spent from your HSA during the year?
How much was spent was spent on qualified medical expenses during the year?

Any difference noticed above (amount not spent on QME) will be taxed and penalized.

Rule #5: Record all of your HSA transactions

So how does the IRS know that you spent your HSA funds on qualified medical expenses? For one, they require that you maintain proof regarding all of your purchases made with your HSA. While they do not ask for it each year, they reserve the right to audit your HSA tax filings at any time. In this scenario, the burden is on you to substantiate all of your HSA spending for a given year(s). You are required to provide proof that the amounts you deducted for your HSA were spent entirely on qualified medical expenses, and likely show receipts that this spending occurred. Not being able to prove this could result in your HSA spending being reclassified as “non qualified” and taxes and penalties assessed.

There are a number of ways you can store this information, from the simple file or shoebox to the high tech excel file or custom website such as TrackHSA.com. Whatever method you choose, be sure that you maintain this information to protect yourself from the tax man.

Rule #6: Account for your HSA taxes correctly

The best laid HSA plans are all for not if you file your taxes incorrectly. Imagine if you save in your HSA for years, use the funds correctly, and diligently record all of your medical expenses and maintain records. If this activity fails to make it to your 1040 tax form in the proper manner, it does not matter and the whole effort has been wasted. In this scenario, you will find yourself paying excessive taxes which could have been avoided.

Form 8889 is the crucial link to insure that the HSA’s tax advantages make there way to Form 1040 in the correct manner. I recommend the use of EasyForm8889.com to accurately complete your HSA tax form 8889, no matter what your HSA situation for the year. With Form 8889 being the main HSA input, the main output on Form 1040 will be your tax liability, which hopefully your HSA has helped reduce.

TrackHSA.com – manage your HSA purchases, receipts, and reimbursements online for free

After being unhappy with my combination shoebox / Excel file HSA tracking system, I designed and created TrackHSA.com to better manage my Health Savings Account. TrackHSA is the first website that allows anyone to track their HSA account activity securely online for free.

HSA’s have a lot of moving parts including funding, taxation, purchases, reimbursements, and government required record keeping. Most HSA custodians (banks) track the in’s and out’s of your actual bank account, but there is little qualitative information about what those transactions were for and how they were justified. The government requires this sort of information for tax filing and it was a pain to maintain. TrackHSA solves this by creating a log of all your HSA eligible purchases, their details, whether or not they have been reimbursed, and allows you to attach a receipt to justify the expense.

It started based on my personal aggravations with my HSA:

keeping receipts in a shoe box
manually maintaining purchase history in Excel on one computer
not knowing how much I could withdraw from my HSA account to reimburse credit card purchases
incomplete information when tax time rolled around

TrackHSA addresses this by:

uploading a receipt to each purchase, storing it safely in the cloud
maintaining a purchase history securely online, accessible from anywhere
calculating your reimbursable amount based on all prior transactions
suggests additional detail for each purchase to help with IRS Form 8889

Hopefully you find it useful, the site is free and the data is stored securely and anonymously on Google’s servers.

Please contact me at Evan@HSAedge.com if you have any questions. If you know someone who would benefit from this free service, please share it with them.

HSA Edge

A resource to help you maximize your Health Savings Account