Form 1099-SA: Distributions From an HSA, Archer MSA, or Medicare Advantage MSA (2021)

What Form 1099-SA Is For

Form 1099-SA is an official IRS tax form that reports distributions (withdrawals) made from three types of tax-advantaged medical savings accounts during the 2021 tax year: Health Savings Accounts (HSAs), Archer Medical Savings Accounts (Archer MSAs), and Medicare Advantage Medical Savings Accounts (Medicare Advantage MSAs). Your account trustee or custodian—typically a bank, insurance company, or other financial institution—sends this form to both you and the IRS to document how much money you withdrew from your account.

Think of Form 1099-SA as a receipt for your medical account withdrawals. Just as your employer sends you a W-2 showing your wages, your account administrator sends you a 1099-SA showing your distributions. The form includes critical information such as the total amount distributed, any earnings on excess contributions that were withdrawn, a distribution code indicating the type of withdrawal, and which type of account the money came from.

According to the 2021 Instructions for Forms 1099-SA and 5498-SA, the distribution may have been paid directly to a medical service provider or to you as the account holder. Understanding this form is essential because distributions used for qualified medical expenses are generally tax-free, while distributions for non-medical purposes trigger taxes and potentially steep penalties.

When You’d Use It (Late Filing/Amended Returns)

Late Filing

You should receive Form 1099-SA by January 31, 2022 (for tax year 2021) if you took any distributions from your HSA, Archer MSA, or Medicare Advantage MSA during 2021. You must report this information when you file your tax return, even if you're filing late or need to amend a previously filed return.

Late Filing: If you didn't file your 2021 tax return by the April 15, 2022 deadline and you received a Form 1099-SA, you still need to include this information on your return whenever you file it. The form doesn't expire—you must account for these distributions regardless of when you complete your tax return.

Amended Returns

Amended Returns: If you discover errors after filing your original 2021 return—such as forgetting to report your 1099-SA, reporting the wrong amount, or incorrectly calculating qualified medical expenses—you'll need to file Form 1040-X (Amended U.S. Individual Income Tax Return) to correct the mistake. Common scenarios requiring amendments include: receiving a corrected 1099-SA from your account administrator after you've already filed, discovering you miscalculated which expenses were actually qualified medical expenses, or realizing you forgot to include Form 8889 (Health Savings Accounts) with your original return.

Corrected Forms

Corrected Forms: According to IRS instructions, if your account trustee discovers an error and issues a corrected 1099-SA, you should use the corrected information when filing. If you've already filed your return using incorrect information, you'll need to amend it using the corrected form.

Key Rules for 2021

Understanding the tax treatment of your Form 1099-SA distributions is crucial. Here are the essential rules that governed these accounts in 2021:

Tax-Free vs. Taxable Distributions

Distributions from your HSA or Archer MSA are completely tax-free if you used them to pay qualified medical expenses incurred after you established the account. As stated in Publication 969 (2021), qualified medical expenses include costs for diagnosis, cure, mitigation, treatment, or prevention of disease. This covers doctor visits, prescription medications, hospital care, dental and vision care, and many other health-related expenses.

The 20% Penalty

If you use HSA or Archer MSA distributions for non-qualified expenses and you're under age 65, you'll face harsh consequences. The withdrawn amount becomes taxable income, and you must pay an additional 20% penalty tax on top of regular income taxes. For example, if you withdrew $1,000 for a vacation and you're in the 22% tax bracket, you'd owe $220 in income tax plus a $200 penalty—a total of $420 in taxes on a $1,000 withdrawal.

Age 65 Exception

Once you reach age 65, the 20% penalty no longer applies to non-qualified distributions, though you still owe regular income tax on them. Disability or death also exempts you from the penalty.

Contribution Limits for 2021

For context, the 2021 HSA contribution limits were $3,600 for self-only coverage and $7,200 for family coverage, with an additional $1,000 catch-up contribution allowed for those age 55 or older. These limits matter because excess contributions can lead to distributions that are reported on Form 1099-SA.

No Annual Distribution Requirement

Unlike some retirement accounts, you're not required to take distributions from your HSA or Archer MSA each year. Money can remain in the account and grow tax-free indefinitely.

Distribution Codes

Box 3 of Form 1099-SA contains a critical distribution code: Code 1 (normal distributions), Code 2 (excess contributions), Code 3 (disability), Code 4 (death distribution to estate), Code 5 (prohibited transaction), or Code 6 (death distribution to non-spouse beneficiary). These codes help the IRS understand the nature of your distribution.

Step-by-Step (High Level)

Step 1: Receive and Review Your Form 1099-SA

By late January or early February 2022, you should receive Form 1099-SA from your account trustee. Check that Box 1 (Gross Distribution) matches your records, Box 3 shows the correct distribution code, and Box 5 indicates the right account type (HSA, Archer MSA, or Medicare Advantage MSA).

Step 2: Gather Documentation of Qualified Medical Expenses

Collect receipts, invoices, and explanation of benefits (EOB) statements for all medical expenses you paid using your HSA/MSA distributions. You don't submit these with your tax return, but you must keep them in case of an IRS audit. The IRS requires "clear and convincing evidence" that expenses were qualified.

Step 3: Complete Form 8889

All HSA distributions must be reported on Form 8889 (Health Savings Accounts), which you attach to Form 1040, 1040-SR, or 1040-NR. According to the 2021 Form 8889 instructions, you must file this form if you (or your spouse, if filing jointly) received HSA distributions in 2021, even if you have no taxable income. On Form 8889, you'll report the gross distribution from Box 1 of your 1099-SA, calculate your qualified medical expenses, and determine if any portion is taxable.

Step 4: Calculate Taxable Distributions and Penalties

Form 8889 walks you through determining whether your distributions exceed your qualified medical expenses. If they do, the excess is taxable income reported on your Form 1040. If you're under 65 and not disabled, you'll also calculate the 20% additional tax in Part III of Form 8889, which transfers to Schedule 2 (Form 1040).

Step 5: File Your Complete Tax Return

Include Form 8889 with your Form 1040, ensuring all information from your 1099-SA is accurately reported. Keep your 1099-SA and all supporting documentation for at least three years (the IRS recommends longer).

Step 6: Report to Your State (If Applicable)

Some states have different rules for HSA taxation. Check your state's requirements, as you may need to report distributions differently on your state return.

Common Mistakes and How to Avoid Them

Mistake #1: Not Filing Form 8889

Many taxpayers receive a 1099-SA and incorrectly assume they don't need to report it because they used the money for medical expenses. The truth: You must file Form 8889 anytime you take HSA distributions, regardless of whether they're taxable. The IRS matches 1099-SA forms to tax returns, and missing Form 8889 can trigger an audit notice.

How to Avoid It: Always attach Form 8889 to your tax return when you receive a 1099-SA, even if the entire distribution was for qualified medical expenses that result in zero tax owed.

Mistake #2: Assuming All Distributions Are Tax-Free

Just because money came from your HSA doesn't mean it's automatically tax-free. You must actually use it for qualified medical expenses. Many people mistakenly believe the IRS doesn't track this—but they're wrong. The burden of proof is on you to demonstrate expenses were qualified.

How to Avoid It: Only use your HSA for expenses you're certain are qualified. Review IRS Publication 502 for the complete list. When in doubt, pay out-of-pocket and save your HSA funds.

Mistake #3: Poor Record-Keeping

Failing to keep receipts and documentation is perhaps the most common error. According to IRS instructions, while you don't submit proof with your return, you must maintain records to substantiate qualified medical expenses if audited.

How to Avoid It: Create a dedicated folder (physical or digital) for all medical receipts and EOBs. Note on each receipt that it was paid with HSA funds and the date of the distribution. Many HSA administrators offer tools to upload and store receipts electronically.

Mistake #4: Withdrawing for Expenses That Aren't Qualified

Common non-qualified expenses that trap people include: over-the-counter medications (unless prescribed—note that the CARES Act changed this rule for amounts paid after 2019), health club memberships, cosmetic procedures, and health insurance premiums (with limited exceptions).

How to Avoid It: Before making an HSA withdrawal, verify the expense is qualified by checking Publication 502 or consulting a tax professional. When uncertain, it's safer to pay another way.

Mistake #5: Ignoring "Mistaken Distributions"

If you accidentally withdrew HSA funds for a non-qualified expense due to a reasonable mistake, you can return the money to your HSA by April 15 following the year you discovered the error. According to IRS guidance, the repayment won't be subject to the 20% penalty or income tax, and it's not treated as a contribution. However, many people don't know about this option and unnecessarily pay penalties.

How to Avoid It: If you realize you made a distribution mistake, act quickly to return the funds before the deadline. Contact your HSA administrator, as they may need to issue a corrected 1099-SA.

Mistake #6: Confusion with Form 5498-SA

Form 5498-SA reports contributions to your account, while Form 1099-SA reports distributions. These are completely separate forms serving different purposes. Some taxpayers confuse them or try to use one in place of the other.

How to Avoid It: Understand that 5498-SA (received in May) shows money going into your account, while 1099-SA (received in January/February) shows money coming out. You need Form 8889 to reconcile both.

What Happens After You File

IRS Processing and Matching

After you file your 2021 tax return with Form 8889 attached, the IRS computers will match your reported Form 1099-SA information against the forms submitted by your account trustees. This matching process typically occurs several months after filing. If everything matches and you've correctly reported qualified medical expenses, you shouldn't hear anything further from the IRS.

Potential IRS Notices

If there's a discrepancy—such as your trustee reporting a distribution that doesn't appear on your Form 8889, or the amounts don't match—you may receive a CP2000 notice (Underreported Income) from the IRS. This notice proposes additional tax based on the unreported distribution. You'll have the opportunity to respond, explaining the discrepancy or providing documentation that the expenses were qualified. According to IRS procedures, you typically have 30 days to respond to such notices.

Audit Risk and Documentation

While most returns aren't audited, HSA distributions can increase your audit risk, especially if you claim large amounts as qualified medical expenses. If audited, you must produce receipts, invoices, and proof that expenses were incurred after the HSA was established. The IRS can disallow expenses if you can't provide adequate documentation, resulting in additional taxes, penalties, and interest.

State Tax Implications

After filing your federal return, consider your state tax obligations. Most states that have income tax conform to federal HSA rules, meaning tax-free qualified distributions at the federal level are also tax-free at the state level. However, California and New Jersey don't recognize HSAs for state tax purposes, requiring different reporting.

Refund or Additional Tax Owed

If your Form 1099-SA shows distributions that exceed your qualified medical expenses and you didn't properly account for this when filing, you'll owe additional tax plus the 20% penalty (if under 65). Conversely, if you mistakenly treated qualified distributions as taxable, you may be entitled to a refund by filing an amended return.

Record Retention

The IRS generally has three years from your filing date to audit your return, though this can extend to six years in cases of substantial underreporting. Keep your Form 1099-SA, Form 8889, and all supporting medical expense documentation for at least three years, though seven years is recommended for maximum protection.

FAQs

Q1: Do I need to report my Form 1099-SA if I only used the money for qualified medical expenses?

Yes, absolutely. Even if 100% of your distribution went toward qualified medical expenses and results in zero tax owed, you must still file Form 8889 with your tax return to report the distribution. The IRS receives a copy of your 1099-SA from your trustee and will expect to see it reported on your return. Failing to file Form 8889 can trigger an IRS notice, even when no tax is actually owed.

Q2: What if I receive a corrected Form 1099-SA after I've already filed my tax return?

If the corrected form shows different amounts than what you originally reported, you should file an amended return using Form 1040-X. According to IRS guidance, trustees should issue corrected forms when errors are discovered. Attach the corrected 1099-SA to your amended return along with a corrected Form 8889 showing the accurate distribution information.

Q3: Can I avoid the 20% penalty if I accidentally used my HSA for non-qualified expenses?

Possibly, through the "mistaken distribution" provision. If you made the withdrawal due to a reasonable mistake of fact (for example, you genuinely but mistakenly believed an expense was qualified), you can repay the distribution to your HSA by April 15 following the first year you knew or should have known about the mistake. If you meet this deadline, the distribution isn't included in income, isn't subject to the 20% penalty, and the repayment isn't treated as a contribution. However, your trustee must be willing to accept the return and should issue a corrected 1099-SA. This option is detailed in IRS Notice 2004-50.

Q4: I'm 66 years old. Do different rules apply to my HSA distributions?

Yes. Once you reach age 65, the 20% additional penalty no longer applies to non-qualified distributions, although such distributions are still included in your taxable income (similar to traditional IRA distributions). This makes HSAs particularly valuable for retirees—you can use them penalty-free for any purpose after 65, though you'll pay income tax on non-medical withdrawals. You still must report all distributions on Form 8889 regardless of your age.

Q5: What's the difference between Box 1 and Box 2 on Form 1099-SA?

Box 1 shows your total gross distribution—all the money that came out of your account during 2021. Box 2 specifically reports earnings on excess contributions that were withdrawn. For example, if you over-contributed to your HSA and withdrew the excess by the tax filing deadline, Box 2 would show any investment gains on that excess amount. The Box 2 amount is already included in the Box 1 total. If Box 2 has an amount, your Form 1099-SA should show distribution code 2 in Box 3. As explained in the 2021 instructions, you must include Box 2 earnings in your income.

Q6: Can I take an HSA distribution to reimburse myself for medical expenses I paid years ago?

Yes, as long as the expenses were incurred after you established your HSA. There's no time limit for reimbursing yourself for qualified medical expenses. This is a powerful HSA strategy: pay medical expenses out-of-pocket, keep the receipts, let your HSA grow tax-free, and reimburse yourself years later. However, meticulous record-keeping is essential, as you must be able to prove the expenses were qualified, incurred after the HSA was established, and not previously reimbursed or deducted.

Q7: What happens if I don't file Form 8889 at all?

The IRS will likely send you a CP2000 notice proposing that your entire Form 1099-SA distribution is taxable income, plus the 20% penalty if you're under 65. You'll then need to respond to the notice with a completed Form 8889 and documentation proving the distributions were for qualified medical expenses. This creates significant hassle and potential penalties for late response. According to IRS matching procedures, it's far easier to file Form 8889 correctly with your original return than to deal with IRS notices later.

Sources

• 2021 Instructions for Forms 1099-SA and 5498-SA (IRS.gov)
• Publication 969 (2021): Health Savings Accounts and Other Tax-Favored Health Plans (IRS.gov)
• About Form 1099-SA (IRS.gov)
• Publication 502: Medical and Dental Expenses (IRS.gov)

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