Form 8889: Health Savings Accounts (HSAs) – 2016 Tax Year Guide
What the Form Is For
Form 8889 is the IRS form you use to report everything related to your Health Savings Account (HSA) when filing your 2016 tax return. Think of it as your HSA's annual report card that you attach to your Form 1040 or 1040NR. You'll use this form to report money that went into your HSA (whether you put it in, your employer did, or someone else contributed on your behalf), calculate your tax deduction, report money you took out, and figure out if you owe any taxes or penalties. An HSA is a special tax-advantaged savings account that lets you set aside money for medical expenses if you have a qualifying high-deductible health plan. The beauty of this account is the triple tax benefit: contributions reduce your taxable income, the money grows tax-free, and withdrawals for qualified medical expenses aren't taxed.
When You'd Use It (Including Late or Amended Filings)
You must file Form 8889 if any of these situations applied to you in 2016: you (or anyone else, including your employer) made contributions to your HSA; you received any distributions from your HSA; you need to report income because you failed to maintain eligibility during a ""testing period"" after using special contribution rules; or you became the beneficiary of someone else's HSA because they passed away. Even if you have no other reason to file a tax return, you still must file Form 1040 with Form 8889 attached if you received HSA distributions in 2016. For late or amended filings, you have until April 18, 2017 (the tax filing deadline for 2016 returns) to make HSA contributions that count for 2016. If you filed your original return on time but made a mistake, you can file an amended return using Form 1040X and include a corrected Form 8889. Special timing rules apply if you need to withdraw excess contributions—generally, you have until the filing deadline (including extensions) to fix contribution errors without penalty.
Key Rules and Limits for 2016
To contribute to an HSA in 2016, you must be an ""eligible individual,"" which means you're covered by a high-deductible health plan (HDHP) on the first day of each month, you have no other health coverage (with certain exceptions), you're not enrolled in Medicare, and you can't be claimed as a dependent on someone else's tax return. For 2016, an HDHP must have a minimum annual deductible of $1,300 for self-only coverage or $2,600 for family coverage, and maximum out-of-pocket expenses cannot exceed $6,550 for self-only or $13,100 for family coverage. The contribution limits for 2016 are $3,350 for self-only coverage and $6,750 for family coverage. If you were 55 or older by December 31, 2016, you could contribute an additional $1,000 as a ""catch-up"" contribution. A valuable special rule called the ""last-month rule"" says that if you were eligible on December 1, 2016, you're considered eligible for the entire year and can contribute the full annual amount—but you must remain eligible through December 31, 2017 (the ""testing period""), or face taxes and penalties on the extra contribution you wouldn't have been able to make otherwise.
How to Complete Form 8889 (High-Level Step-by-Step)
Form 8889 has three main parts. Part I (HSA Contributions and Deduction) is where you calculate your allowable deduction. Start by indicating whether you had self-only or family coverage. On line 2, enter all contributions you made (or that others made for you) during 2016, including those made through April 18, 2017, that were designated for 2016. On line 3, you'll figure your contribution limit based on how many months you were eligible and what type of coverage you had—if you were eligible all year with the same coverage, this is straightforward ($3,350 or $6,750), but if your situation changed mid-year, you may need to use the worksheet in the instructions. Line 9 captures employer contributions (shown in Box 12 of your W-2 with code W). After accounting for any IRA-to-HSA transfers, you'll determine your actual deduction on line 13, which flows to line 25 of Form 1040.
Part II (HSA Distributions) is where you report money you took out of your HSA. Enter total distributions received in 2016 (from Form 1099-SA) on line 14a, then show any qualified medical expenses you paid with those distributions on line 15. Qualified medical expenses generally include unreimbursed costs that would be deductible on Schedule A—doctor visits, prescriptions, dental care, and more—for you, your spouse, or your dependents. Line 16 shows any taxable distributions, and line 17 calculates the additional 20% tax if you're under 65 and used HSA money for non-medical purposes.
Part III (Income and Additional Tax) is only needed if you used the last-month rule or made an IRA-to-HSA transfer but then failed to remain eligible during the required testing period.
Common Mistakes and How to Avoid Them
One of the most common errors is over-contributing to your HSA, which happens when you contribute more than your annual limit or forget to account for employer contributions when calculating how much you can personally contribute. Always check Box 12 (code W) of your W-2 to see what your employer contributed, and subtract that from your maximum limit before making additional contributions. If you do over-contribute, you face a 6% excise tax every year the excess remains in your account unless you withdraw it (and any earnings on it) by your tax filing deadline. Another frequent mistake is using the last-month rule without understanding the testing period requirement—if you became eligible on December 1, 2016, and contributed the full yearly amount, but then lost eligibility in 2017 (perhaps by enrolling in Medicare or changing to non-HDHP coverage), you'll owe income tax plus a 10% penalty on the portion you wouldn't have been able to contribute without the last-month rule. Many people also incorrectly claim Schedule A medical expense deductions for expenses they paid with tax-free HSA distributions—you can't double-dip by getting both a tax-free withdrawal and a tax deduction for the same expense. Additionally, folks sometimes take distributions for non-qualified expenses (like gym memberships or over-the-counter medicines without a prescription) without realizing they'll pay income tax plus a 20% penalty on those amounts if they're under 65. Finally, married couples with separate HSAs often get confused about family contribution limits—if either spouse has family coverage, the $6,750 family limit applies to both spouses combined, not each individually, unless you properly allocate the contributions between your separate accounts.
What Happens After You File
Once you submit Form 8889 with your tax return, the deduction you claimed on line 13 reduces your adjusted gross income, potentially lowering your overall tax bill. The IRS will have received copies of Forms W-2 (showing employer HSA contributions) and Forms 1099-SA (showing distributions from your HSA) directly from your employer and HSA trustee, so they can verify your reported figures. If your Form 8889 shows you owe the 6% excise tax on excess contributions, you'll also need to file Form 5329 to calculate and pay that additional tax. Any taxable distributions or penalties from Part II or Part III of Form 8889 will increase your tax liability for the year. Your HSA itself continues to operate normally after you file—it doesn't close or reset at tax time. The money remains available to you indefinitely, growing tax-free and available for future qualified medical expenses even if you change jobs, change insurance, or become ineligible to make new contributions. Around May 2017, you should receive Form 5498-SA from your HSA trustee showing the total contributions made to your HSA during 2016 (including the early 2017 contributions designated for 2016)—this is an informational form you keep for your records; you don't file it with your return. If the IRS spots discrepancies between your Form 8889 and the information they received from third parties, they may send you a letter requesting clarification or proposing changes to your return, which is why keeping good records of all contributions, distributions, and medical expense receipts is essential.
FAQs
Can I contribute to an HSA if I'm covered by my spouse's health plan?
Generally no, if your spouse's plan covers you and it's not an HDHP, you're not eligible to contribute to an HSA. However, if your spouse has non-HDHP coverage but that coverage doesn't extend to you (perhaps it's self-only coverage), you can still contribute to your own HSA if you have qualifying HDHP coverage.
What medical expenses qualify for tax-free HSA withdrawals?
Most unreimbursed medical expenses that would qualify for the medical expense deduction on Schedule A are qualified—including doctor visits, hospital stays, prescription medications, dental care, vision care, and many more items detailed in IRS Publication 502. However, for HSA purposes, over-the-counter medicines don't qualify unless you have a prescription (insulin is the exception). The expenses must be incurred after you established your HSA, and you can use your HSA to pay medical expenses for yourself, your spouse, and your tax dependents.
What happens if I use my HSA debit card for something that's not a qualified medical expense?
You'll need to report that distribution as taxable income on line 16 of Form 8889, and if you're under age 65, you'll also owe an additional 20% penalty tax on that amount. Once you turn 65, you can withdraw money for any reason without the 20% penalty (though non-medical withdrawals are still taxable as ordinary income, similar to a traditional IRA).
Do I have to use my HSA money in the year I contribute it, or does it expire?
Unlike Flexible Spending Accounts (FSAs) that have ""use it or lose it"" rules, HSA money never expires. It rolls over year after year, accumulates, and remains yours even if you change jobs, change insurance, retire, or become ineligible to make new contributions. This makes HSAs powerful long-term savings vehicles for healthcare costs in retirement.
How does the last-month rule really work, and should I use it?
If you become eligible for an HSA on December 1, 2016 (the first day of the last month of the year), you can contribute as if you were eligible all 12 months and claim the full annual contribution limit. The catch: you must remain an eligible individual through December 31, 2017 (13 months total). If you lose eligibility during that testing period—by enrolling in Medicare, switching to non-HDHP coverage, or being claimed as a dependent—you'll owe income tax plus a 10% penalty on the extra contribution you got to make. Use this rule if you're confident you'll maintain eligibility through the following year; skip it if there's uncertainty.
Can I pay for medical expenses now and reimburse myself from my HSA later?
Yes, absolutely. As long as the medical expense was incurred after you established your HSA, you can pay it out-of-pocket and reimburse yourself from the HSA months or even years later. There's no time limit. Many savvy HSA users pay medical expenses with regular money, keep their receipts, let the HSA grow tax-free for years or decades, and then reimburse themselves in retirement—essentially turning the HSA into a super-IRA for healthcare.
What should I do if I contributed too much to my HSA in 2016?
Contact your HSA trustee immediately to withdraw the excess contribution plus any earnings attributable to it before your tax filing deadline (including extensions). If you do this timely, you'll avoid the 6% annual excise tax on the excess, though you'll still need to report the earnings as taxable income. If you miss that deadline, you'll pay 6% every year the excess remains in the account, but you can potentially deduct those excess contributions in future years when you have unused contribution room.
Sources: IRS Form 8889 Instructions for 2016 | IRS Publication 969 for 2016
