Form 1099-SA: Distributions From an HSA, Archer MSA, or Medicare Advantage MSA (2011)

What Form 1099-SA Is For

Form 1099-SA is an information return that reports distributions (withdrawals) made from three types of tax-advantaged medical savings accounts during the 2011 tax year: Health Savings Accounts (HSAs), Archer Medical Savings Accounts (Archer MSAs), and Medicare Advantage Medical Savings Accounts (MA MSAs). The trustee or custodian of your account—typically a bank, insurance company, or other financial institution—is required to send you this form if you withdrew any money from your account during 2011.

Think of Form 1099-SA as a receipt that documents how much money you took out of your medical savings account. The distribution might have been paid directly to a doctor, hospital, or pharmacy, or it might have been deposited into your personal bank account. Either way, the IRS needs to know about it because these withdrawals have important tax consequences depending on how you used the money.

The form itself is relatively simple, containing key information including the total amount distributed (Box 1), any earnings on excess contributions (Box 2), a distribution code that explains the type of withdrawal (Box 3), and the type of account involved (Box 5). This information flows directly onto other tax forms you'll need to complete when filing your 2011 return, particularly Form 8889 for HSA distributions or Form 8853 for Archer MSA and MA MSA distributions.

When You’d Use Form 1099-SA

Late Filing and Amended Returns

You should have received your Form 1099-SA from your account trustee by January 31, 2012, for distributions made during calendar year 2011. If you didn't receive your form, contact your account administrator immediately. You'll need this information to accurately complete your 2011 tax return, which for most taxpayers was originally due on April 17, 2012.

If you're filing a late return for 2011 or amending your 2011 return, you still need to include all information from your Form 1099-SA. Late filers should gather all Forms 1099-SA they received for 2011, along with receipts documenting qualified medical expenses, and file as soon as possible to minimize penalties and interest. The IRS imposes penalties for failing to file tax returns on time, and the longer you wait, the more these penalties accumulate.

If you need to amend your 2011 return because you either didn't report Form 1099-SA distributions originally or reported them incorrectly, you'll use Form 1040X (Amended U.S. Individual Income Tax Return). Common reasons for amendments include discovering you made a mistake calculating taxable distributions, finding receipts for qualified medical expenses you forgot to count, or receiving a corrected Form 1099-SA from your trustee after filing your original return. You have three years from the original filing deadline to amend a return and potentially claim a refund, so for 2011 returns, the deadline would have been April 2015.

It's worth noting that if your account trustee discovers an error and sends you a corrected Form 1099-SA marked "CORRECTED" in the designated box, you should use this new form to amend your return if you've already filed, or use it for your original filing if you haven't submitted your return yet.

Key Rules or Details for 2011

Qualified vs. Non-Qualified Expenses

The fundamental rule governing Form 1099-SA for 2011 is straightforward but critical: distributions are tax-free only if you used them to pay qualified medical expenses. For HSA and Archer MSA distributions, qualified medical expenses include unreimbursed costs for yourself, your spouse, or your dependents. For MA MSA distributions, the expenses must be for the account holder only—a more restrictive requirement.

Qualified medical expenses generally include payments for services by physicians, surgeons, dentists, and other medical practitioners, as well as costs for equipment, supplies, diagnostic devices, and prescription medicines. These are essentially the same expenses that could be deducted on Schedule A as medical expenses if you itemized deductions, with some important HSA-specific additions.

Taxability and 20% Additional Tax

If you use HSA or Archer MSA funds for non-qualified expenses, two negative tax consequences apply: First, the distribution becomes taxable income that you must report on your 2011 Form 1040. Second, you'll owe an additional 20% penalty tax on the taxable amount (reported on Form 5329), unless you qualify for an exception. The main exceptions to this penalty are distributions made after you turn 65, become disabled, or die.

Mistaken Distributions Repayment

For 2011, there's an important provision regarding HSA mistaken distributions. If you withdrew money believing an expense was qualified but later discovered it wasn't, you could repay the mistaken distribution to your HSA by April 15 following the year you discovered the mistake, avoiding both income tax and penalties on that distribution. However, your account trustee isn't required to accept these repayments—they have discretion to allow or prohibit them.

Rollovers and Transfers

Rollovers have special rules: HSAs can be rolled over to another HSA, Archer MSAs can be rolled over to another Archer MSA or to an HSA, but MA MSAs are more restrictive. Rollovers don't count as taxable distributions if completed correctly, and trustee-to-trustee transfers aren't reported on Form 1099-SA at all.

Identification Number Truncation

The 2011 filing saw the end of a pilot program that allowed truncation of taxpayer identification numbers on payee statements, meaning your complete Social Security number or taxpayer identification number appears on all copies of your Form 1099-SA.

Step-by-Step (High Level)

Step 1: Receive and Review Your Form

By January 31, 2012, you should have received Form 1099-SA from your account trustee showing your 2011 distributions. Carefully review all information, especially Box 1 (gross distribution amount), Box 3 (distribution code), and Box 5 (account type). Verify these numbers match your records.

Step 2: Gather Supporting Documentation

Collect all receipts, invoices, and explanation of benefits statements for medical expenses you paid in 2011 using your HSA, Archer MSA, or MA MSA funds. You'll need these to prove the distributions were used for qualified expenses. The IRS doesn't require you to submit these with your return, but you must keep them for your records in case of an audit.

Step 3: Complete the Appropriate Tax Form

Transfer information from Form 1099-SA to Form 8889 (for HSA distributions) or Form 8853 (for Archer MSA and MA MSA distributions). These forms calculate whether any portion of your distribution is taxable. You'll compare the total distributions from Box 1 of Form 1099-SA against your qualified medical expenses for the year.

Step 4: Calculate Your Taxable Distribution

If your qualified medical expenses equal or exceed your distributions, congratulations—your entire distribution is tax-free. If your distributions exceed qualified expenses, you'll have taxable income. Form 8889 or 8853 will walk you through this calculation and determine if you owe the additional 20% penalty tax.

Step 5: Report on Your Form 1040

Attach completed Form 8889 or 8853 to your Form 1040. Any taxable amount flows to the "Other income" line of your return. If you owe the additional 20% tax, you'll also complete Form 5329 (Additional Taxes on Qualified Plans).

Step 6: File and Keep Records

File your complete return by the April 17, 2012 deadline (or October 15, 2012 if you filed an extension). Keep copies of your Form 1099-SA, your completed tax forms, and all supporting receipts for at least three years—longer if possible, as the IRS can audit returns up to six years in certain circumstances.

Common Mistakes and How to Avoid Them

Mistake #1: Not Reporting the Distribution at All

Some taxpayers mistakenly believe that if they used HSA money only for qualified medical expenses, they don't need to report anything on their tax return. This is incorrect. Even when distributions are fully tax-free, you must still file Form 8889 or 8853 with your return to report the distribution. The IRS receives a copy of your Form 1099-SA directly from your trustee and will send you a notice if you don't report it.

Mistake #2: Throwing Away Receipts Too Soon

Many people assume that because their HSA debit card was approved at the pharmacy, they don't need to keep receipts. However, merchant approval doesn't prove to the IRS that the expense was qualified. In an audit, you'll need actual receipts showing the date, provider, type of service or item, and amount. Save all documentation for at least three years after filing—preferably indefinitely for HSA records.

Mistake #3: Confusing Distribution Years with Expense Years

The timing rule is critical: you can only use 2011 HSA distributions tax-free for expenses incurred in 2011 or earlier (for previously unreimbursed expenses). You cannot use 2011 distributions for expenses you'll incur in 2012 or later. Some taxpayers get confused because HSA contributions made in early 2012 can be designated for 2011, but this flexibility doesn't apply to the expense timing rule.

Mistake #4: Missing the Mistaken Distribution Repayment Deadline

If you accidentally withdrew money for what you thought was a qualified expense but wasn't, you had until April 15, 2012 to repay it to your HSA and avoid taxes and penalties. Many taxpayers discover this option too late. If you caught the mistake in time but your trustee has a policy allowing repayments, you needed to act quickly and ensure the repayment was properly documented.

Mistake #5: Not Reporting Excess Contribution Earnings

Box 2 of Form 1099-SA shows earnings on excess contributions that were distributed. These earnings are always taxable income, even if you used them to pay qualified medical expenses. Some taxpayers mistakenly exclude these earnings from income. These must be reported on the "Other income" line of Form 1040 in addition to being included in your Form 8889 or 8853 calculations.

Mistake #6: Paying Non-Spouse Expenses from MA MSA

Medicare Advantage MSA rules are stricter than HSA rules: MA MSA distributions are only tax-free for the account holder's own qualified expenses, not for spouses or dependents. Some taxpayers who've been using HSAs for family expenses make this mistake when they transition to MA MSAs after enrolling in Medicare.

What Happens After You File

Once you file your 2011 tax return including Form 8889 or 8853, the IRS processes your return and matches the information you reported against the Form 1099-SA your trustee filed directly with the agency. In most cases, if everything matches and you've correctly reported the distributions, you won't hear anything further from the IRS about your Form 1099-SA.

IRS Notices (CP2000) and Discrepancies

If the IRS computer systems detect a discrepancy—for example, your trustee reported a $3,000 distribution but you only reported $2,000—you'll receive a notice, typically a CP2000 (Proposed Changes to Your Tax Return). This notice explains the discrepancy and proposes additional tax, penalties, and interest. You'll have an opportunity to respond, either agreeing with the proposed changes or explaining why your return was correct. Common explanations include corrected Forms 1099-SA that the IRS hasn't yet processed or calculation errors that can be documented.

Audit Considerations and Record Requests

Your return, including the Form 1099-SA distributions, could potentially be selected for audit within three years of filing (or six years in cases of substantial underreporting). During an audit, the IRS examiner will ask you to provide proof that your HSA or MSA distributions were used for qualified medical expenses. This is why keeping detailed records is so important. You'll need to produce receipts, explanation of benefits forms from insurance companies, and other documentation showing the nature, date, and amount of each medical expense.

Amending After Filing

If you discover after filing that you made an error related to Form 1099-SA—perhaps you found additional medical expense receipts that would reduce your taxable distribution—you can file an amended return using Form 1040X. You generally have three years from the original filing date to amend and claim a refund. Conversely, if you discover you under-reported taxable distributions, you should file an amended return as soon as possible to minimize penalties and interest.

Statute of Limitations for Refunds

For the 2011 tax year, any refund you're owed from correctly reporting HSA or MSA distributions would need to have been claimed by the statute of limitations deadline, typically three years from the original filing date (so April 2015 for most taxpayers). After that deadline, you lose the right to claim any refund, even if you can prove you overpaid taxes.

FAQs

Q1: I received Form 1099-SA but used all the money for medical expenses. Do I still need to report it?

Yes, absolutely. Even when your entire distribution is tax-free because you used it for qualified medical expenses, you must still file Form 8889 (for HSA) or Form 8853 (for Archer MSA or MA MSA) with your Form 1040. The IRS receives a copy of every Form 1099-SA issued and expects to see these distributions reported on your tax return. Failing to file the appropriate form can trigger an IRS notice and potential penalties, even if no tax is ultimately owed. The forms are designed to show the calculation proving your distribution was tax-free, which is information the IRS needs to verify.

Q2: What happens if I can't find my receipts for qualified medical expenses?

This is a serious problem if the IRS audits your return. Without receipts, you cannot prove that distributions were used for qualified medical expenses, which means the IRS can treat the entire distribution as taxable income plus assess the 20% additional tax. Your best bet is to reconstruct documentation: contact medical providers for copies of bills, request explanation of benefits statements from your insurance company, get pharmacy records, and check your HSA administrator's records (many keep track of what merchant you paid). Bank and credit card statements showing payments to medical providers can serve as supporting evidence. Going forward, scan and digitally store all medical receipts to prevent this problem.

Q3: Can I use my 2011 HSA distribution to pay for medical expenses I had in 2010?

Yes, as long as those 2010 expenses occurred after you established your HSA and you haven't already reimbursed yourself for them. HSAs allow you to reimburse yourself for previously unreimbursed qualified medical expenses at any time after the expenses were incurred. However, you must have documentation proving the 2010 expenses were not previously reimbursed by your HSA or any other source. Many taxpayers strategically pay medical expenses out-of-pocket initially, saving receipts, and reimburse themselves from their HSA years later when they need the cash for other purposes.

Q4: I received Form 1099-SA with Distribution Code 2. What does this mean?

Distribution Code 2 indicates you withdrew excess contributions (amounts that exceeded the annual contribution limits) plus any earnings on those excess contributions. Box 2 of your form will show the earnings amount separately. Here's what you need to know: if you withdrew the excess contribution and earnings by the tax filing deadline (including extensions), the excess contribution itself isn't subject to the 6% excise tax on excess contributions, but the earnings are always taxable income. You must report these earnings on the "Other income" line of your Form 1040, in addition to completing Form 8889 or 8853. This applies even if you used the withdrawal for qualified medical expenses—excess contribution earnings are always taxable when distributed.

Q5: My Form 1099-SA shows a distribution, but I rolled the money over to another HSA. Is it taxable?

If you properly completed a rollover from one HSA to another HSA (or from an Archer MSA to an HSA), the rollover isn't taxable. However, you must report the rollover on Form 8889 to show the IRS why the distribution shown on Form 1099-SA shouldn't be taxed. There are strict rules: the rollover must be completed within 60 days of receiving the distribution, and you can only do one rollover per 12-month period. If you took the money and directly deposited it into another qualified account within 60 days, document the transaction carefully. Note that trustee-to-trustee transfers (where the money goes directly from one institution to another without you touching it) are generally not reported on Form 1099-SA at all and are the safer method if you're moving HSA funds between accounts.

Q6: I see both Form 1099-SA and Form 5498-SA. What's the difference?

Form 1099-SA reports distributions (money you took out), while Form 5498-SA reports contributions (money you or your employer put in). Both are information forms that help you complete your tax return, but they serve different purposes. Form 5498-SA is due to you by May 31, 2012 for the 2011 tax year, whereas Form 1099-SA was due by January 31, 2012. You'll use information from both forms to complete Form 8889 or 8853. Form 5498-SA shows contributions made in 2011 and also contributions made in early 2012 that you designated for 2011 (up to the April 17, 2012 filing deadline), which affects your allowable deduction and calculations on your 2011 return.

Q7: What if my Form 1099-SA is wrong?

Contact your account trustee immediately and request a corrected Form 1099-SA. The trustee will issue a new form marked "CORRECTED" in the appropriate box. If you've already filed your tax return using the incorrect information and the correction changes your tax liability, you'll need to file an amended return (Form 1040X) once you receive the corrected form. Don't file your original return with information you know is incorrect—wait for the correction. Common errors include wrong distribution amounts, incorrect distribution codes, or distributions attributed to the wrong year. Keep all correspondence with your trustee documenting the error and correction.

Sources

All information in this guide is based on official IRS publications, specifically the 2011 Instructions for Forms 1099-SA and 5498-SA and the 2011 Form 1099-SA available from IRS.gov.

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