Form 1099-SA: Distributions From an HSA, Archer MSA, or Medicare Advantage MSA (2013)

What Form 1099-SA Is For

Form 1099-SA is an information return that reports distributions (withdrawals) you received from three types of tax-advantaged medical savings accounts during the 2013 tax year: Health Savings Accounts (HSAs), Archer Medical Savings Accounts (Archer MSAs), and Medicare Advantage Medical Savings Accounts (MA MSAs). When you withdraw money from any of these accounts, the financial institution (trustee or custodian) that holds your account must send you this form and file a copy with the IRS.

Think of Form 1099-SA as a receipt showing how much money you took out of your medical savings account. The form itself doesn't determine whether you owe taxes on the distribution—that depends on how you used the money. If you spent the distribution on qualified medical expenses (like doctor visits, prescriptions, or hospital bills), the withdrawal is generally tax-free. However, if you used the money for non-medical purposes (like groceries, rent, or vacation), you'll owe income tax on that amount, plus potentially a 20% penalty tax.

The form contains several key pieces of information: Box 1 shows the total gross distribution amount, Box 2 reports any earnings on excess contributions that were withdrawn, Box 3 contains a distribution code explaining what type of withdrawal occurred, Box 4 shows the fair market value on the date of death (if the account holder died), and Box 5 identifies which type of account the distribution came from.

When You’d Use Form 1099-SA (and Late/Amended Returns)

Standard Timeline

Your account trustee must send you Form 1099-SA by January 31, 2014, for distributions made during the 2013 calendar year. They file Copy A with the IRS by February 28, 2014 (or March 31, 2014, if filing electronically). You'll use this form when preparing your 2013 tax return, which is due April 15, 2014.

Late or Corrected Forms

Sometimes trustees discover errors after filing the original form or fail to send it on time. If you receive a corrected Form 1099-SA (marked "CORRECTED" in the checkbox at the top), you must use the corrected information when filing your tax return. If you've already filed your 2013 return using incorrect information, you'll need to file Form 1040X (Amended U.S. Individual Income Tax Return) to correct your previously filed return. You generally have three years from the original filing deadline to amend a return.

If You Never Receive It

If January 31 passes and you haven't received your Form 1099-SA but you know you took distributions during 2013, contact your account trustee immediately to request a copy. Don't wait—you're still required to report the distribution on your tax return even if you never receive the form. Keep your own records of withdrawals as backup documentation.

Key Rules or Details for 2013

Qualified Medical Expenses

The cornerstone rule is that HSA and Archer MSA distributions are tax-free only when used for qualified medical expenses of yourself, your spouse, or your dependents. For MA MSAs, distributions must be used only for the account holder's qualified medical expenses. Qualified medical expenses generally include costs that would be deductible on Schedule A (such as doctor visits, prescriptions, dental care, vision care, and medical equipment), but there are important exceptions. Over-the-counter medicines do not qualify unless prescribed by a doctor (insulin is always qualified even without a prescription).

Insurance Premium Exception

You generally cannot use HSA funds tax-free to pay insurance premiums, with four specific exceptions: (1) long-term care insurance, (2) COBRA or health care continuation coverage, (3) health insurance while receiving unemployment compensation, and (4) Medicare premiums if you're 65 or older (but not Medicare supplemental policies like Medigap).

Timing Matters

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

The 20% Penalty

If you use HSA or Archer MSA distributions for non-medical expenses and you're under age 65, you'll pay ordinary income tax plus an additional 20% penalty tax on the taxable amount. This penalty doesn't apply if you're 65 or older, disabled, or deceased. MA MSA distributions used for non-medical purposes are also subject to income tax and penalties.

Death of Account Holder

Special rules apply when the account owner dies. If the surviving spouse is the designated beneficiary, they become the new account owner and the account continues as before. If a non-spouse inherits the account, it ceases to be an HSA/MSA, and the fair market value on the date of death becomes taxable income to the beneficiary (though medical expenses of the deceased paid within one year after death can offset this).

Contribution Limits for Context

While Form 1099-SA reports distributions, understanding 2013 contribution limits helps you plan. For 2013, HSA contribution limits were $3,250 for self-only coverage and $6,450 for family coverage, with an additional $1,000 if age 55 or older.

Step-by-Step (High Level)

Step 1: Receive and Review the Form

When your Form 1099-SA arrives in January 2014, verify all information immediately. Check that your name, address, and Social Security number are correct. Confirm the gross distribution amount in Box 1 matches your records of withdrawals. Note the distribution code in Box 3 and which account type is checked in Box 5.

Step 2: Gather Documentation

Collect receipts, bills, and proof of payment for all medical expenses you paid with the distributions. Organize these by date and expense type. Without documentation, you risk the IRS treating your entire distribution as taxable income if audited. Keep credit card statements, canceled checks, and explanation of benefits (EOB) forms from your insurance company.

Step 3: Complete Form 8889 (for HSA) or Form 8853 (for Archer/MA MSA)

You must file one of these forms with your tax return to report your distributions, even if the entire amount was used for qualified medical expenses and isn't taxable. On Form 8889 (or 8853), you'll report the distribution amount from Box 1 in Part II. Then you'll indicate how much was used for qualified medical expenses. The difference between the total distribution and qualified medical expenses becomes taxable income.

Step 4: Calculate Any Taxable Amount

If you used any part of the distribution for non-qualified expenses, that portion goes on your Form 1040 as taxable income (reported through Form 8889 or 8853). If you're under age 65 (or not disabled), you'll also calculate the 20% additional tax on Form 8889, Part III (or Form 8853).

Step 5: File Your Tax Return

Attach the completed Form 8889 or Form 8853 to your Form 1040 when you file by April 15, 2014. Even if all your distributions were for qualified medical expenses and completely tax-free, you still must file these forms to document the distributions.

Step 6: Keep Records

The IRS recommends keeping tax records for at least three years after filing, but for HSA/MSA distributions, keep documentation for seven years or longer. This protects you if questions arise later about whether expenses truly qualified.

Common Mistakes and How to Avoid Them

Mistake #1: Not Filing Form 8889 or Form 8853

Many taxpayers mistakenly believe that if they used all distributions for medical expenses, they don't need to report anything. Wrong. You must file Form 8889 (for HSAs) or Form 8853 (for Archer/MA MSAs) whenever you receive any distribution, even if completely tax-free. The IRS matches Form 1099-SA reports against tax returns, and missing forms trigger automated notices.

Mistake #2: Poor Record-Keeping

Taking distributions throughout the year but failing to keep receipts creates problems. By tax time, you may not remember what you spent the money on, forcing you to treat distributions as taxable. Solution: Create a dedicated folder (physical or digital) for medical expense documentation. When you take a distribution, immediately file the corresponding receipt showing the medical expense paid.

Mistake #3: Claiming Expenses Twice

You cannot deduct medical expenses on Schedule A (Form 1040) as itemized deductions if you paid for them with tax-free HSA distributions. This is double-dipping and is not allowed. Choose one or the other: either use HSA funds tax-free or pay out-of-pocket and claim the itemized deduction (if it exceeds the threshold).

Mistake #4: Paying Non-Qualified Expenses

Some expenses seem medical but aren't qualified for HSA purposes. Common examples include cosmetic procedures (unless medically necessary), gym memberships (even with a doctor's recommendation), vitamins and supplements (unless prescribed for a specific condition), and over-the-counter medications without a prescription (except insulin). When in doubt, check IRS Publication 502 before using HSA funds.

Mistake #5: Misunderstanding the 20% Penalty

The additional 20% tax is separate from regular income tax. If you're in the 25% tax bracket and take a $1,000 non-qualified distribution, you'll owe $250 in income tax plus $200 in penalty tax (total: $450). This 45% effective tax rate makes non-qualified withdrawals expensive. If you absolutely need the money for non-medical purposes, wait until age 65 when the penalty no longer applies (though regular income tax still does).

Mistake #6: Ignoring Distribution Codes

Box 3 contains a distribution code that provides important information. Code 1 is normal distribution, Code 2 is excess contributions, Code 3 is disability, Code 4 is death distribution, Code 5 is prohibited transaction, and Code 6 is death distribution after year of death. These codes affect how you report the distribution and what taxes apply. Don't ignore them.

What Happens After You File

IRS Matching Process

After you file your 2013 return, the IRS uses automated systems to match the Form 1099-SA that your trustee filed with the distributions you reported on Form 8889 or Form 8853. If the amounts don't match or you failed to file the required form, you'll likely receive a CP2000 notice (Underreporter Inquiry) proposing additional tax, penalties, and interest. This typically arrives 12-18 months after filing.

If Everything Matches

When your return correctly reports all distributions and you've used them for qualified medical expenses with proper documentation, the IRS processes your return normally. You won't hear anything further about your HSA/MSA distributions. Keep your documentation in case of future audit, but no immediate action is needed.

If You Receive a Notice

Don't panic if you receive an IRS notice about your Form 1099-SA. Respond within the timeframe specified (usually 30 days). If you agree with the IRS's findings because you did make a mistake, pay the amount due to minimize interest and penalties. If you disagree because you have documentation proving the distributions were for qualified medical expenses, send copies (not originals) of your receipts, bills, and explanation along with the response form provided with the notice.

State Tax Implications

Remember that most states follow federal tax treatment for HSA/MSA distributions, meaning qualified medical expense distributions are also state tax-free. However, a few states (California, New Jersey, and Alabama in certain cases) have different rules. Check your state's tax agency website or consult a tax professional about your state's specific treatment.

Future Planning

The experience of handling your 2013 Form 1099-SA should inform your future HSA/MSA management. If you found record-keeping challenging, implement better systems now. If you inadvertently used funds for non-qualified expenses and faced penalties, be more careful going forward. Consider keeping HSA funds invested for future medical expenses in retirement, when distributions for qualified medical expenses remain tax-free forever.

FAQs

Q1: I used my HSA debit card throughout 2013 for medical expenses, but I also made some mistakes and paid for groceries a couple of times. What do I do?

Calculate the total of your non-medical purchases and include that amount as taxable income on Form 8889, Part II. You'll report it on your Form 1040 and pay both regular income tax and the 20% additional tax (if you're under 65). For future years, consider requesting reimbursement from your HSA instead of using the debit card—this gives you time to verify expenses are qualified before taking the money out.

Q2: My Form 1099-SA shows a distribution, but I know I only took money out for dental work and prescription medications. Is it automatically tax-free?

Dental work and prescription medications are indeed qualified medical expenses, so your distribution should be tax-free. However, you still must file Form 8889 with your tax return documenting this. On the form, you'll show the distribution amount and indicate that an equal amount was used for qualified medical expenses. The net result is zero taxable income, but filing the form is mandatory.

Q3: I turned 65 in October 2013. Do distributions I took in November and December still face the 20% penalty if I used them for non-medical purposes?

No. Once you reach age 65, the 20% additional tax no longer applies to non-qualified distributions. However, you still pay ordinary income tax on amounts not used for qualified medical expenses. Note that the exemption begins on the date you turn 65, so distributions before October would still face the penalty if not used for medical expenses.

Q4: My spouse died in 2013 and I'm the beneficiary of their HSA. Do I need to file Form 1099-SA?

As the surviving spouse and designated beneficiary, you become the new account owner, and the HSA continues as if it were always yours. Any distributions you receive will be reported on Form 1099-SA in your name, and you'll file Form 8889 with your return as usual. The account doesn't lose its HSA status, which is a significant benefit compared to non-spouse beneficiaries.

Q5: I received Form 1099-SA but also contributed to my HSA in 2013. Do both get reported on the same Form 8889?

Yes. Form 8889 is comprehensive—Part I reports your contributions and calculates your deduction, while Part II reports your distributions and any taxable amounts. Even if you didn't take any distributions, you must file Form 8889 if you made contributions. The form reconciles both sides of your HSA activity for the year.

Q6: Can I reimburse myself from my HSA for medical expenses I paid out-of-pocket earlier in 2013, even though I'm doing the reimbursement in 2014?

Yes, as long as the medical expenses were incurred after you established your HSA. There's no time limit for reimbursement, though you must keep records documenting the expenses. Many people deliberately pay medical expenses out-of-pocket, save receipts, and reimburse themselves years later when they need the cash, allowing HSA investments to grow tax-free longer. The distribution will appear on your 2014 Form 1099-SA (issued in January 2015), but it covers 2013 medical expenses.

Q7: Box 2 of my Form 1099-SA shows an amount for "earnings on excess contributions." What does this mean?

This means you contributed more than the allowable limit to your HSA in a previous year, and in 2013, you withdrew that excess contribution along with the earnings it generated. The excess contribution withdrawal itself isn't taxed if withdrawn timely, but the earnings are always taxable and go on the "Other income" line of your Form 1040. This amount is also included in the Box 1 gross distribution figure.

Additional Resources

• IRS Publication 502 (Medical and Dental Expenses) – www.irs.gov/publications/p502
• IRS Publication 969 (2013) – www.irs.gov/pub/irs-prior/p969--2013.pdf
• 2013 Form 1099-SA Instructions – www.irs.gov/pub/irs-prior/i1099sa--2013.pdf
• IRS Information Reporting Customer Service: 1-866-455-7438

This summary provides general information about Form 1099-SA for tax year 2013 based on IRS publications and instructions. Tax situations vary, and this guide doesn't constitute professional tax advice. Consult IRS publications or a qualified tax professional for guidance specific to your circumstances.

‍