Form 1099-SA: Understanding Distributions From Health Savings Accounts (2015)

What Form 1099-SA Is For

Form 1099-SA is an informational tax document that reports any money you withdrew (called "distributions") from your Health Savings Account (HSA), Archer Medical Savings Account (Archer MSA), or Medicare Advantage MSA during the 2015 tax year. Think of it as a receipt that shows the IRS—and you—how much money came out of these special medical savings accounts.

Your HSA trustee or custodian (typically a bank, insurance company, or financial institution) is required to send you this form if you took any distributions during 2015. This includes money you withdrew directly, amounts paid with your HSA debit card, and any payments made directly to medical service providers from your account.

The form itself is fairly simple, containing key information including the total gross distribution amount (Box 1), any earnings on excess contributions (Box 2), a distribution code explaining the type of withdrawal (Box 3), and if applicable, the fair market value of the account on the date of death (Box 4). Box 5 indicates which type of account the distribution came from—HSA, Archer MSA, or Medicare Advantage MSA.

The crucial point to understand is that Form 1099-SA is an information form only—it doesn't determine whether your distribution is taxable. The trustee who issues this form is not required to calculate the taxable amount. That responsibility falls on you when you complete Form 8889 and file it with your tax return.

When You’d Use Form 1099-SA

According to IRS instructions, you should receive Copy B of Form 1099-SA from your trustee by February 1, 2016.

You need to report the distribution information on Form 8889 (Health Savings Accounts) or Form 8853 (Archer MSAs and Medicare Advantage MSAs), which must be attached to your Form 1040 when you file your federal income tax return. Even if your distribution was completely for qualified medical expenses and is therefore not taxable, you still must file the appropriate form with your return.

Late and Amended Returns

If you failed to report your Form 1099-SA on your original 2015 tax return, you should file an amended return using Form 1040X. This situation might arise if you discovered unreported distributions, received a corrected Form 1099-SA after filing, or made an error in calculating the taxable portion of your distribution. The IRS generally allows three years from the original filing deadline to file an amended return, so for 2015 returns, the deadline would typically be April 18, 2019 (three years from the extended 2016 deadline).

Corrected Forms 1099-SA

If your trustee discovers an error—such as an incorrect distribution amount or wrong distribution code—they must issue a corrected Form 1099-SA. The corrected form will have a checkbox marked "CORRECTED" at the top. When you receive a corrected form, use the corrected information on your tax return or file an amended return if you've already filed.

Key Rules or Details for 2015

Several important rules governed Form 1099-SA and HSA distributions in 2015, based on IRS guidance:

Tax-Free vs. Taxable Distributions

Distributions from your HSA or Archer MSA are tax-free only if you used them to pay qualified medical expenses for yourself, your spouse, or your dependents. Qualified medical expenses generally include costs that would qualify for the medical and dental expenses deduction, such as doctor visits, prescription medications, hospital stays, and dental care. However, non-prescription medicines (except insulin) do not qualify for HSA purposes—even over-the-counter medications require a prescription to be considered qualified.

The 20% Penalty

If you withdraw money from your HSA or Archer MSA for non-qualified expenses before age 65, you must not only include that amount in your taxable income but also pay an additional 20% penalty tax on the withdrawal. This harsh penalty is designed to discourage using these accounts as general savings vehicles rather than for medical expenses. The penalty is calculated on Form 8889, Part III, or Form 8853.

Contribution Limits for 2015

For context, the maximum contribution limits in 2015 were $3,350 for self-only HDHP coverage and $6,650 for family HDHP coverage. If you were age 55 or older, you could contribute an additional $1,000 "catch-up" contribution. These limits are relevant because excess contributions that are withdrawn by the tax filing deadline (plus any earnings on those contributions) must be reported on Form 1099-SA with distribution code 2.

Death of Account Holder

Special rules apply when an account holder dies. If the designated beneficiary is the surviving spouse, the spouse becomes the account holder and the account continues. For non-spouse beneficiaries, the fair market value of the account on the date of death must be included in their income. Box 4 of Form 1099-SA reports this fair market value, and Box 3 will show either code 4 (death distribution other than to non-spouse) or code 6 (death distribution after year of death to non-spouse beneficiary).

Medicare Advantage MSAs

These accounts have unique rules—only Medicare can make contributions, and distributions are tax-free only when used to pay qualified medical expenses of the account holder (not family members like with HSAs).

Mistaken Distributions

For HSAs specifically, if you withdrew money due to a mistake of fact (such as believing an expense was qualified when it wasn't), you can repay the mistaken distribution no later than April 15 following the first year you knew or should have known about the mistake, provided your trustee allows the repayment.

Step-by-Step (High Level)

Here's how the Form 1099-SA process works from start to finish:

Step 1: Receive the Form

Your HSA, Archer MSA, or Medicare Advantage MSA trustee sends you Form 1099-SA by February 1, 2016. Review it carefully to ensure the distribution amount in Box 1 matches your records and the distribution code in Box 3 is correct.

Step 2: Gather Documentation

Collect all receipts and documentation for medical expenses you paid during 2015, including explanations of benefits from your insurance, prescription receipts, and itemized bills from healthcare providers. You'll need these to prove that your distributions were for qualified medical expenses.

Step 3: Determine Qualified vs. Non-Qualified Expenses

Compare the total distribution amount from Box 1 of Form 1099-SA to your total qualified medical expenses. Only expenses incurred after you established your HSA count as qualified (except under the last-month rule). Remember that insurance premiums generally don't count unless they're for long-term care, COBRA, unemployment-related health coverage, or Medicare (if you're 65 or older).

Step 4: Complete Form 8889 or Form 8853

For HSAs, complete Form 8889 and attach it to your Form 1040. For Archer MSAs or Medicare Advantage MSAs, use Form 8853 instead. Part II of Form 8889 (or the comparable section of Form 8853) is where you report distributions. You'll enter the gross distribution from Box 1 of Form 1099-SA, then subtract your qualified medical expenses to determine if any portion is taxable.

Step 5: Calculate Taxes and Penalties

If you have taxable distributions (because you used the money for non-qualified expenses), you must include that amount in your income on the "Other income" line of Form 1040. Additionally, if you're under 65 and the distribution wasn't due to death or disability, calculate the 20% additional tax using Part III of Form 8889 or Form 8853.

Step 6: File Your Tax Return

Submit your completed Form 1040 with the attached Form 8889 or Form 8853 by April 18, 2016 (or October 17, 2016, if you file for an extension). Keep all documentation for at least three years in case of an IRS inquiry.

Common Mistakes and How to Avoid Them

Mistake #1: Not Filing Form 8889 or Form 8853

The most common error is simply failing to file the required form with your tax return. Even if your entire distribution was for qualified medical expenses and completely tax-free, you still must file Form 8889 or Form 8853. Solution: Always attach the appropriate form whenever you receive a Form 1099-SA, regardless of whether you owe taxes on the distribution.

Mistake #2: Confusing Distribution Codes

Box 3 contains crucial codes that explain the nature of your distribution. Code 1 is for normal distributions, code 2 for excess contributions, code 3 for disability, code 4 for death distributions, code 5 for prohibited transactions, and code 6 for death distributions after the year of death to non-spouse beneficiaries. Using the wrong code or misunderstanding what your code means can lead to incorrect tax calculations. Solution: Carefully review the distribution code on your Form 1099-SA and consult the form instructions if you're unsure what it means.

Mistake #3: Claiming Non-Qualified Expenses as Qualified

Many people mistakenly believe that all health-related expenses qualify for tax-free HSA distributions. Common errors include treating over-the-counter medications (without prescriptions) as qualified, claiming health club memberships, or including expenses that were reimbursed by insurance. Solution: Consult IRS Publication 502 for the complete list of qualified medical expenses, and when in doubt, err on the side of caution or consult a tax professional.

Mistake #4: Double-Dipping on Deductions

You cannot deduct medical expenses on Schedule A (Form 1040) if you paid for them with a tax-free HSA distribution. This is a form of "double-dipping" that the IRS doesn't allow. Solution: Keep meticulous records separating expenses paid from your HSA from those paid out-of-pocket. Only include out-of-pocket medical expenses on Schedule A.

Mistake #5: Forgetting About the 20% Penalty

Many taxpayers report the taxable distribution as income but forget to calculate and pay the additional 20% penalty tax for non-qualified distributions made before age 65. This results in an underpayment that can trigger penalties and interest. Solution: If you have any taxable distribution and you're under 65, always complete Part III of Form 8889 or Form 8853 to calculate the additional tax.

Mistake #6: Not Keeping Adequate Records

The IRS doesn't require you to submit receipts with your return, but you must retain documentation to substantiate that your distributions were for qualified medical expenses. Without proper records, you cannot prove the distributions were tax-free if audited. Solution: Maintain a dedicated file with all medical receipts, explanations of benefits, and documentation showing how each distribution was used.

Mistake #7: Ignoring Earnings on Excess Contributions

If you contributed more than the annual limit and withdrew the excess by the tax filing deadline, the earnings on those excess contributions (shown in Box 2) must be included in your income even if they were used for qualified medical expenses. Many people overlook this. Solution: Pay special attention to Box 2 of Form 1099-SA and include any amount shown there on the "Other income" line of your tax return.

What Happens After You File

Once you submit your 2015 tax return with Form 8889 or Form 8853 attached, several things occur:

IRS Processing

The IRS matches the information on your Form 8889 or Form 8853 against the Form 1099-SA that your trustee filed with them (Copy A). This matching process typically happens automatically through IRS computers. If the amounts don't match or if you failed to file the required form, you may receive a notice from the IRS requesting clarification or assessing additional taxes.

Future Distributions

Your Form 1099-SA reporting for 2015 doesn't restrict your ability to take future distributions from your HSA, Archer MSA, or Medicare Advantage MSA. These accounts remain available for qualified medical expenses in subsequent years. The balance remaining in your account (shown on Form 5498-SA, which you should receive by June 1, 2016) continues to grow tax-free.

Audit Potential

While most tax returns are not audited, HSA distributions can be a red flag if the amounts seem disproportionate to your income or if you claim large distributions as entirely tax-free without corresponding medical expenses. If selected for audit, you'll need to provide documentation proving your distributions were for qualified medical expenses. The IRS has three years from your filing date to initiate an audit for most issues, though this extends to six years for substantial underreporting.

Refunds or Additional Taxes

If your Form 1099-SA distribution includes taxable amounts and you didn't have enough withholding or estimated tax payments, you may owe taxes when you file. Conversely, if you had sufficient withholding from other income sources, you might receive a refund. The 20% penalty tax (if applicable) increases any tax owed or reduces any refund.

Amended Return Consequences

If you later discover an error in how you reported your Form 1099-SA, you can file Form 1040X to correct it. If the correction results in additional taxes owed, you'll also owe interest from the original filing deadline. However, if the correction results in a refund, you must file the amended return within three years of the original filing date.

FAQs

Q1: I received Form 1099-SA but all my distributions were for qualified medical expenses. Do I still need to report it?

Yes, absolutely. Even if your entire distribution was for qualified medical expenses and is therefore not taxable, you must still file Form 8889 (for HSAs) or Form 8853 (for Archer MSAs or Medicare Advantage MSAs) with your tax return. The IRS requires this filing to reconcile the Form 1099-SA information they received from your trustee. Failing to file the form can result in IRS notices and inquiries, even if you don't actually owe any taxes.

Q2: What's the difference between Form 1099-SA and Form 5498-SA?

These forms report different information about your account. Form 1099-SA reports distributions (money coming out of your account) during 2015, while Form 5498-SA reports contributions (money going into your account) and the year-end account balance. You receive Form 1099-SA by February 1, 2016, but Form 5498-SA arrives later, by June 1, 2016, because contributions can be made up until the tax filing deadline. Both forms are important but serve different purposes in your tax reporting.

Q3: I used my HSA debit card for both qualified and non-qualified expenses during 2015. How do I report this?

All distributions shown on Form 1099-SA must be accounted for on Form 8889. Add up all your qualified medical expenses for 2015, then compare that total to the gross distribution amount in Box 1 of Form 1099-SA. If your qualified expenses equal or exceed your total distributions, the entire distribution is tax-free. If your distributions exceed your qualified expenses, the difference is taxable income subject to the 20% penalty (if you're under 65). You must maintain documentation separating qualified from non-qualified expenses.

Q4: Can I pay for my spouse's or children's medical expenses with my HSA even though they're not listed on the Form 1099-SA?

Yes. Form 1099-SA only shows the account holder's information, but HSA distributions can be used tax-free to pay qualified medical expenses for yourself, your spouse, and anyone you can claim as a dependent on your tax return. You can also pay for expenses of someone you could have claimed as a dependent except that they filed a joint return, had gross income of $4,000 or more, or you (or your spouse) could be claimed as a dependent on someone else's return.

Q5: I received a Form 1099-SA showing distribution code 2 (excess contributions). What does this mean?

Distribution code 2 indicates that you contributed more than the annual limit to your HSA or Archer MSA and withdrew the excess contribution by the tax filing deadline. While the excess contribution withdrawal itself isn't taxed, any earnings on those excess contributions (shown in Box 2) must be included in your income. You report these earnings on the "Other income" line of your Form 1040, even if you used them for qualified medical expenses. This is an exception to the normal rule that distributions for qualified expenses are tax-free.

Q6: What happens if my Form 1099-SA has an error on it?

Contact your HSA trustee immediately to request a corrected Form 1099-SA. Common errors include incorrect distribution amounts, wrong distribution codes, or incorrect account holder information. Your trustee should issue a corrected form marked "CORRECTED" at the top. If you've already filed your tax return using incorrect information, you should file an amended return (Form 1040X) once you receive the corrected Form 1099-SA. Don't ignore errors, as the IRS will match their records against what you report.

Q7: I'm over 65 years old. Does the 20% penalty still apply if I use my HSA distribution for non-medical expenses?

No. Once you reach age 65, you can withdraw money from your HSA for any reason without paying the 20% penalty. However, if you use the distribution for non-qualified medical expenses, you must still include that amount in your taxable income—you just avoid the additional 20% penalty. Distributions used for qualified medical expenses remain tax-free at any age. This makes HSAs function somewhat like traditional IRAs after age 65, though using them for medical expenses is still advantageous since those distributions remain entirely tax-free.

Additional Resources

For More Information:

• IRS Form 1099-SA Instructions (2015) - Available at IRS.gov
• IRS Publication 969: Health Savings Accounts (2015) - Available at IRS.gov
• IRS Form 8889 Instructions - Available at IRS.gov

Notes

This guide provides general information based on 2015 IRS rules. For specific tax advice regarding your situation, consult a qualified tax professional.

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