Form 1099-SA is a critical IRS information return used to report distributions from Health Savings Accounts (HSAs), Archer Medical Savings Accounts (Archer MSAs), and Medicare Advantage MSAs (MA MSAs). If you withdrew money from any of these tax-advantaged medical accounts, you will likely receive this form. Understanding the details of Form 1099-SA is essential to determine whether the distribution is taxable and to avoid penalties.
In this blog, we’ll provide a comprehensive breakdown of Form 1099-SA, explain how to read it, how it affects your tax return, and what steps to take to ensure compliance while maximizing tax benefits.
1. What Is Form 1099-SA?
Form 1099-SA, officially titled “Distributions From an HSA, Archer MSA, or Medicare Advantage MSA,” is issued by the custodian or trustee of your account to report the total amount of distributions you received in a tax year. The IRS uses this form to assess whether those distributions were used for qualified medical expenses, which are generally tax-free, or for non-qualified purposes, which are taxable and may incur penalties.
2. Who Issues and Receives Form 1099-SA?
Your HSA, Archer MSA, or MA MSA administrator (typically a bank, credit union, or insurance company) is responsible for issuing Form 1099-SA. You will receive this form if you took any distribution from one of these accounts during the tax year, regardless of the reason.
The form is sent both to you and to the IRS, usually by January 31 of the following year. You should keep this form with your tax documents and use it to complete other required forms, such as Form 8889 for HSAs.
3. What Information Does Form 1099-SA Include?
Form 1099-SA consists of six key boxes that provide essential financial and informational data:
- Box 1 – Gross Distribution: The total amount of money withdrawn from your account during the year.
- Box 2 – Earnings on Excess Contributions: If you made excess contributions and later withdrew them, this box shows the earnings portion, which may be taxable.
- Box 3 – Distribution Code: A code indicating the type of distribution (e.g., normal, death, disability, excess contribution, etc.).
- Box 4 – FMV on Date of Death: Shows the fair market value of the account if the account holder died during the year. Used when reporting inherited accounts.
- Box 5 – Account Type: Identifies the type of account: HSA, Archer MSA, or MA MSA.
This information helps you determine the taxability of your distribution and guides the proper reporting on your return.
4. Types of Accounts Reported on Form 1099-SA
Health Savings Accounts (HSAs)
HSAs are tax-advantaged accounts available to individuals enrolled in a high-deductible health plan (HDHP). Contributions are tax-deductible, growth is tax-deferred, and distributions used for qualified medical expenses are tax-free.
Archer MSAs
Archer MSAs are the predecessor to HSAs and are available only to self-employed individuals and small businesses with HDHPs. Though rarely used today, existing accounts remain valid and are reported using Form 1099-SA.
Medicare Advantage MSAs (MA MSAs)
MA MSAs are medical savings accounts for Medicare beneficiaries. Contributions come from Medicare itself, and qualified medical expenses can be paid tax-free from the account.
5. Understanding Box 3 – Distribution Codes
The code in Box 3 is essential for determining how the IRS will treat your distribution. Common codes include:
- 1 – Normal Distribution: A standard withdrawal, typically for qualified medical expenses.
- 2 – Excess Contributions: Distribution of excess contributions and related earnings.
- 3 – Disability: Distributions made after becoming disabled.
- 4 – Death (non-spouse beneficiary): Distribution due to account holder’s death; may be taxable depending on beneficiary type.
- 5 – Prohibited Transaction: Indicates the account was disqualified due to misuse (e.g., pledging the account as collateral).
Knowing the distribution code is critical for accurate reporting and to determine if taxes or penalties apply.
6. Tax Treatment of Distributions
Distributions from HSAs, Archer MSAs, and MA MSAs are tax-free only if used for qualified medical expenses. These expenses must be incurred by the account holder, their spouse, or dependents and must not be reimbursed by insurance or another source.
If a distribution is used for non-qualified purposes, the following rules apply:
- The earnings portion is included in gross income and taxed as ordinary income.
- A 20% additional tax applies to non-qualified HSA and Archer MSA distributions unless an exception applies.
- The 20% penalty does not apply if you are age 65 or older, disabled, or deceased.
7. How to Report Form 1099-SA on Your Tax Return
For HSA holders, you must file Form 8889 along with your Form 1040. Use the information from Form 1099-SA to complete the following sections:
- Form 8889, Line 14a: Report total distributions (from Box 1 of Form 1099-SA).
- Line 15: Enter qualified medical expenses paid during the year.
- Line 16: Calculate any taxable portion of the distribution.
- Line 17b: Apply the 20% penalty if applicable.
For Archer MSA or MA MSA holders, use Form 8853 to report distributions and determine taxability.
8. Reporting Death of the Account Holder
If the account holder passed away during the tax year, special rules apply. The recipient of the account (usually a spouse or beneficiary) is responsible for reporting the value of the account at the time of death. If the spouse is the beneficiary, the account becomes theirs and continues to be treated as an HSA. If the beneficiary is not the spouse, the entire fair market value is taxable income to the beneficiary in the year of death (Box 4 reflects this amount).
9. Correcting Excess Contributions
If you contributed more than the allowed annual limit to your HSA or MSA, you must withdraw the excess before the tax filing deadline (typically April 15) to avoid penalties. Box 2 of Form 1099-SA will reflect earnings on those excess contributions. The earnings portion must be reported as income on Form 1040, and may be subject to tax.
10. Recordkeeping and Documentation
Always maintain records to prove that your HSA or MSA distributions were used for qualified medical expenses. These records should include:
- Receipts or invoices for medical services
- Proof of payment from your HSA or MSA
- Health insurance Explanation of Benefits (EOBs)
- Pharmacy or medical equipment receipts
Good recordkeeping is essential in the event of an IRS audit or if you need to justify withdrawals for tax-free treatment.
11. Common Errors to Avoid
- Assuming all distributions are automatically tax-free
- Failing to file Form 8889 or Form 8853 when required
- Using HSA funds for cosmetic procedures or other non-qualified expenses
- Missing the April deadline to remove excess contributions
- Overlooking inherited HSA tax implications
These mistakes can lead to unnecessary taxes, penalties, and IRS scrutiny. Always verify how your HSA or MSA funds are used and how they’re reported.
12. When to Seek Professional Help
You should consult a tax professional if:
- You used HSA or MSA funds for non-traditional expenses
- You received a 1099-SA with code 2, 4, or 5
- You inherited an HSA or MA MSA from a deceased account holder
- You have excess contributions that need to be withdrawn
- You are uncertain about what qualifies as a medical expense
A tax expert can help you navigate the complexities of Form 1099-SA and ensure you avoid penalties while maximizing your tax-free benefits.
Conclusion
Form 1099-SA is an essential tax document for anyone who received distributions from an HSA, Archer MSA, or Medicare Advantage MSA. While these accounts offer substantial tax benefits, using them incorrectly or failing to report distributions properly can lead to significant tax liabilities and penalties.
By understanding the structure of the form, tracking how distributions are used, and filing the appropriate forms such as Form 8889 or Form 8853, you can maintain compliance and preserve the tax-free status of your qualified withdrawals. When in doubt, seek guidance from a tax professional to make sure your health-related savings are working in your financial favor.
