Form 1099-SA: Distributions From an HSA, Archer MSA, or Medicare Advantage MSA (2010)

If you withdrew money from your Health Savings Account (HSA), Archer Medical Savings Account (MSA), or Medicare Advantage MSA in 2010, you should have received Form 1099-SA in the mail. This form tells both you and the IRS how much money you took out—but it doesn't tell you whether those withdrawals are taxable. That's your responsibility to figure out. This guide will walk you through everything you need to know about Form 1099-SA for the 2010 tax year, using authoritative information from IRS.gov.

What Form 1099-SA Is For

Form 1099-SA reports distributions (money withdrawn) from three types of tax-advantaged medical savings accounts during 2010. The trustee or custodian of your account—typically a bank, insurance company, or financial institution—sends you this form to report:

• Total distributions you received during the year (shown in Box 1)
• The type of account the money came from: HSA, Archer MSA, or Medicare Advantage MSA (shown in Box 5)
• The distribution code that identifies why you received the money—such as a normal distribution, excess contribution withdrawal, disability, or death benefit (shown in Box 3)
• Any earnings on excess contributions you withdrew (shown in Box 2, if applicable)
• Fair market value on date of death if the account holder died (shown in Box 4, if applicable)

According to the 2010 Form 1099-SA instructions, the distribution might have been paid directly to you or directly to a medical service provider on your behalf—both types are reported on this form.

Important: Form 1099-SA is informational only. The payer is not required to calculate whether your distribution is taxable. You must determine that yourself and report it properly on Form 8889 (for HSAs) or Form 8853 (for Archer MSAs and Medicare Advantage MSAs).

When You’d Use Form 1099-SA

(Late Filing/Amended Returns)

Normal Filing Timeline

You should receive Form 1099-SA by January 31, 2011 (for tax year 2010). You then use this information when filing your 2010 tax return, which was due April 18, 2011.

Late or Amended Situations

You might need to file a late or amended return involving Form 1099-SA in these situations:

• You never filed your 2010 return: If you failed to file originally, you can still file a late return. Include Form 8889 or Form 8853 along with Form 1099-SA information, even years after the deadline. While penalties and interest may apply, filing late is better than not filing at all.
• You received a corrected Form 1099-SA: If your account trustee discovers an error and sends you a corrected form (marked "CORRECTED" in the checkbox), you may need to file an amended return using Form 1040X if you've already filed.
• You forgot to report distributions: If you received Form 1099-SA but didn't report it on your original return, you must file an amended return. The IRS receives a copy of every Form 1099-SA, and failing to report it will likely trigger an IRS notice.
• You incorrectly calculated taxable amounts: If you initially treated non-qualified distributions as qualified (or vice versa), you need to amend your return with corrected calculations on Form 8889 or Form 8853.

Key Rules or Details for 2010

Several important rules governed HSA and MSA distributions in 2010, according to IRS Publication 969 (2010):

Tax-Free vs. Taxable Distributions

Tax-free: Distributions used to pay qualified medical expenses are not taxable. Qualified expenses include unreimbursed medical, dental, and vision costs for you, your spouse, and your dependents—essentially expenses that would qualify for the medical expense deduction on Schedule A.

Taxable: If you use HSA or MSA funds for non-qualified expenses (like vacations, groceries, or paying bills), the distribution is fully taxable as ordinary income.

The 10% Additional Tax Penalty

For 2010, if you took a distribution for non-qualified expenses and you were under age 65 and not disabled, you must pay an additional 10% tax on top of ordinary income tax. This penalty is calculated on Form 8889, Part III (for HSAs) or Form 8853 (for MSAs).

Exception: The penalty does not apply if you're age 65 or older, disabled, or if the distribution was made after the account holder's death.

Over-the-Counter Medicines in 2010

For 2010, non-prescription medicines (other than insulin) still qualified as medical expenses for HSA purposes. Note: This changed after 2010—beginning in 2011, over-the-counter medicines required a prescription to qualify.

Rollovers and Transfers

Rollovers: You can roll over amounts from an Archer MSA to another Archer MSA or to an HSA. HSAs can roll over to other HSAs. You must complete the rollover within 60 days, and you're limited to one rollover per year.

Trustee-to-trustee transfers: Direct transfers between accounts are not reported on Form 1099-SA and have no annual limits.

When Expenses Must Occur

You can only use HSA distributions tax-free for qualified medical expenses incurred after you established the HSA. Expenses incurred before the account was opened don't qualify, even if you pay them later with HSA funds.

Step-by-Step (High Level)

What to Do With Form 1099-SA When Preparing Your 2010 Tax Return

Step 1: Receive and Review the Form

Check that all information is correct: your name, Social Security number, the amount in Box 1 (gross distribution), the distribution code in Box 3, and the account type in Box 5.

Step 2: Gather Your Medical Expense Records

Collect receipts, invoices, and statements for all medical expenses you paid in 2010. You'll need these to prove which distributions were for qualified medical expenses.

Step 3: Complete Form 8889 (for HSAs) or Form 8853 (for MSAs)

• Part I: Report all HSA contributions for the year
• Part II: Report your distributions from Form 1099-SA (Box 1) and calculate how much was used for qualified medical expenses
• Part III: If you had non-qualified distributions, calculate the additional 10% tax (if applicable)

Step 4: Attach Form 8889/8853 to Your Tax Return

File Form 8889 or Form 8853 with your Form 1040. Report any taxable distribution as "Other income" on your Form 1040.

Step 5: Keep Documentation

The IRS doesn't require you to submit receipts with your return, but you must keep them for at least three years in case of an audit. If the IRS questions your qualified medical expenses, you'll need proof.

Common Mistakes and How to Avoid Them

Mistake #1: Not Filing Form 8889 or Form 8853

Many taxpayers receive Form 1099-SA and assume they don't need to do anything if they used the money for medical expenses. Wrong. You must file Form 8889 (HSA) or Form 8853 (MSA) with your tax return, even if the entire distribution was tax-free.

How to avoid: Always file the required form when you receive Form 1099-SA, regardless of how you used the money.

Mistake #2: Using Distributions for Non-Qualified Expenses Without Reporting

Some people spend HSA money on non-medical items and don't report it as taxable income, thinking the IRS won't notice. The IRS receives a copy of every Form 1099-SA and will catch unreported distributions.

How to avoid: Be honest. If you used HSA funds for non-qualified expenses, report it as taxable income and pay the 10% penalty if applicable.

Mistake #3: Claiming Expenses From Before the HSA Was Established

You cannot use HSA distributions tax-free to reimburse yourself for medical expenses that occurred before you opened the account.

How to avoid: Track the date you established your HSA and only use distributions for expenses incurred after that date.

Mistake #4: Double-Dipping on Tax Benefits

You cannot deduct the same medical expenses on Schedule A (itemized deductions) if you paid them with a tax-free HSA distribution.

How to avoid: Keep separate records. If you used HSA funds to pay an expense, do not include that expense in your itemized medical deduction calculation.

Mistake #5: Not Understanding Distribution Codes

Box 3 contains important codes:

• Code 1 (Normal distribution): Most common
• Code 2 (Excess contributions): Requires special reporting
• Code 3 (Disability): May exempt you from the 10% penalty
• Code 4 (Death distribution): Special beneficiary rules apply
• Code 5 (Prohibited transaction): Account loses tax-favored status
• Code 6 (Death distribution after year of death): Applies to non-spouse beneficiaries

How to avoid: Read the Form 1099-SA instructions carefully and understand which code applies to your situation. Each code has different tax implications.

What Happens After You File

If You Reported Everything Correctly

The IRS matches the Form 1099-SA information they received from your account trustee with what you reported on Form 8889 or Form 8853. If everything matches and your return is accurate, your return is processed normally, and you won't hear anything further about Form 1099-SA.

If the IRS Finds a Discrepancy

If the IRS notices you received Form 1099-SA but didn't report it—or if reported amounts don't match—you'll receive a notice, typically a CP2000 (Underreporter Inquiry). This notice proposes additional tax, penalties, and interest.

What to do: Respond within the deadline (usually 30 days). If the IRS is correct, pay the additional amount. If you disagree, provide documentation proving your distributions were for qualified medical expenses.

If You're Audited

The IRS may audit your return and request proof that your HSA distributions were used for qualified medical expenses. You'll need to provide:

• Original receipts or invoices
• Explanation of Benefits (EOB) statements
• Credit card or bank statements showing payment
• Documentation linking each expense to a qualified medical service

Important: If you cannot prove expenses were qualified, the IRS will treat the entire distribution as taxable income plus the 10% penalty (if applicable).

FAQs

Q1: I received Form 1099-SA, but I didn't take any money out of my HSA. What should I do?

Contact your HSA trustee immediately. This might be an error, or there might have been automatic payments or fees you didn't realize were processed. Request a corrected form if it's truly an error.

Q2: Can I use my 2010 HSA distribution to pay for my spouse's medical expenses, even though the account is only in my name?

Yes. According to IRS Publication 969, qualified medical expenses include those for you, your spouse, and all your dependents, regardless of whose name is on the HSA.

Q3: I turned 65 in 2010. Do I still have to pay the 10% penalty if I used HSA money for non-medical expenses?

No. Once you reach age 65, distributions for non-qualified expenses are still subject to ordinary income tax, but the 10% additional tax penalty no longer applies. However, you must still report the distribution as taxable income.

Q4: What if I lost my receipts? Can I still claim the distributions were for qualified expenses?

Technically, you can still claim the expenses were qualified on your tax return. However, if the IRS audits you and you cannot provide documentation, they will assess tax and penalties on the entire distribution. Consider requesting duplicate receipts from healthcare providers or checking credit card statements as backup.

Q5: I made a mistake and withdrew money from my HSA by accident. Can I return it without tax consequences?

For 2010, the IRS allowed "mistaken distribution" rules for HSAs under certain conditions (Notice 2004-50). If amounts were distributed because of a reasonable mistake of fact and you repay them by April 15 following the year you discovered the error, the distribution may not be taxable. However, your HSA trustee must allow this, and they're not required to. Contact your trustee immediately if this applies to you.

Q6: Do I need to attach Form 1099-SA to my tax return when I mail it?

No. Form 1099-SA is for your records. You only need to attach Form 8889 (for HSAs) or Form 8853 (for MSAs) to your Form 1040. Keep Form 1099-SA with your tax records for at least three years.

Q7: I inherited an HSA from my spouse who died in 2010. What do I do with Form 1099-SA?

If you were the designated beneficiary and the surviving spouse, you become the account owner, and the HSA remains an HSA. You'll report this on Form 8889 following the surviving spouse rules. If you're not the spouse, special rules apply, and you must include the fair market value of the account (shown in Box 4 of Form 1099-SA) in your income for the year of death. Consult the 2010 Form 1099-SA instructions for detailed beneficiary rules.

Additional Resources

For complete details, always refer to official IRS resources:

• Form 1099-SA (2010)
• Instructions for Form 1099-SA (2010)
• Publication 969 (2010)
• Form 8889 Instructions (2010)

Conclusion

Form 1099-SA is a critical tax document that reports your HSA, Archer MSA, or Medicare Advantage MSA distributions. While the form itself is straightforward, understanding how to properly report these distributions—and avoid costly mistakes—requires careful attention to IRS rules. Remember: just because you received a distribution doesn't automatically mean it's taxable, but you must properly document and report qualified medical expenses to keep your withdrawals tax-free.

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