Form 1099-SA: Distributions From an HSA, Archer MSA, or Medicare Advantage MSA (2016)

What Form 1099-SA Is For

Form 1099-SA is an information return that reports money you withdrew (called "distributions") from your Health Savings Account (HSA), Archer Medical Savings Account (Archer MSA), or Medicare Advantage MSA during the 2016 tax year. Think of it as a receipt showing how much money came out of your health savings account.

Your HSA trustee or custodian—typically a bank, insurance company, or financial institution—sends you this form if you took any money out of your account during 2016. This includes withdrawals you made directly, payments made to medical providers on your behalf, or money you accessed using a special HSA debit card.

The form itself doesn't determine whether you owe taxes on these withdrawals. Instead, it reports the distributions to both you and the IRS, and you'll use this information when filing your tax return to calculate whether any of the money is taxable. According to IRS Publication 969 (2016), distributions used exclusively for qualified medical expenses are tax-free, but withdrawals for other purposes may be subject to income tax and an additional 20% penalty.

When You’d Use Form 1099-SA

When You Receive It

Your HSA trustee must send you Form 1099-SA by January 31, 2017, for distributions made during 2016. If you moved or changed addresses, make sure your HSA provider has your current contact information.

Normal Filing

You'll use Form 1099-SA when preparing your 2016 tax return (due April 18, 2017). The information from this form gets reported on Form 8889 (Health Savings Accounts), which you attach to your Form 1040 or Form 1040NR.

Late or Missing Forms

If you haven't received your Form 1099-SA by early February 2017, contact your HSA trustee immediately. You're still required to report all HSA distributions on your tax return even if you never receive the form—keep your own records of withdrawals.

Amended Returns

If you discover errors after filing your original return, you may need to file Form 1040X (Amended U.S. Individual Income Tax Return). Common situations requiring amendments include:

• Discovering you used HSA funds for non-qualified expenses but didn't report them as taxable
• Finding receipts showing distributions were actually for qualified medical expenses
• Receiving a corrected Form 1099-SA from your trustee after filing

According to the 2016 Instructions for Forms 1099-SA and 5498-SA, trustees can correct errors by issuing corrected forms, but you're responsible for ensuring your tax return reflects accurate information.

Key Rules or Details for 2016

The Golden Rule

HSA distributions are tax-free only when used for qualified medical expenses. Any other use results in ordinary income tax plus a 20% additional tax (with limited exceptions).

Qualified Medical Expenses (2016)

These generally match the expenses that would qualify for the medical and dental expenses itemized deduction under IRS Code Section 213(d). For 2016, qualified expenses include:

• Doctor visits, hospital stays, and lab tests
• Prescription medications (but not over-the-counter medicines unless prescribed by a doctor)
• Dental and vision care
• Medical equipment and supplies
• Mental health services
• Insulin (even without a prescription)

Who's Covered

You can use HSA funds tax-free for qualified medical expenses of:

• Yourself
• Your spouse
• Your dependents (anyone you can claim on your tax return)
• Children of divorced or separated parents (treated as dependents of both parents for HSA purposes)

Important 2016 Contribution Limits (for context)

• Self-only HDHP coverage: $3,350
• Family HDHP coverage: $6,750
• Additional contribution if age 55+: $1,000

Special Situations

• Insurance Premiums: Generally NOT qualified expenses, except for long-term care insurance, COBRA continuation coverage, health insurance while receiving unemployment benefits, or Medicare premiums if you're 65 or older.
• Timing Matters: Only expenses incurred AFTER you established your HSA count as qualified. You can't reimburse yourself for medical bills from before your HSA existed.
• No Double-Dipping: You cannot deduct medical expenses on Schedule A (Form 1040) if you paid them with tax-free HSA distributions.
• Death of Account Holder: Special rules apply if an HSA owner died in 2016. Surviving spouses become the account holder; other beneficiaries receive taxable distributions (with specific reporting codes).

Step-by-Step (High Level)

Step 1: Receive Your Form 1099-SA

Wait for your HSA trustee to mail Form 1099-SA by January 31, 2017. Review it carefully when it arrives.

Step 2: Understand the Key Boxes

• Box 1 (Gross Distribution): Total amount withdrawn from your HSA in 2016
• Box 2 (Earnings on Excess Contributions): Usually zero; only relevant if you withdrew excess contributions
• Box 3 (Distribution Code): Indicates the type of distribution (Code 1 is most common for normal distributions)
• Box 4 (FMV on Date of Death): Only filled in for death distributions
• Box 5 (Checkbox): Shows whether it was an HSA, Archer MSA, or Medicare Advantage MSA

Step 3: Gather Your Medical Expense Records

Collect receipts, bills, and documentation showing what you spent the HSA money on. You'll need this to prove distributions were for qualified medical expenses. Keep these records even if the IRS doesn't ask for them immediately—you may need them if audited.

Step 4: Complete Form 8889

This is where the actual tax calculation happens. The 2016 Form 8889 has three parts:

• Part I: HSA contributions and deductions
• Part II: HSA distributions (this is where Form 1099-SA information goes)
• Part III: Income and additional tax (if distributions weren't for qualified medical expenses)

Enter the gross distribution amount from Box 1 of Form 1099-SA into Form 8889, Part II. If all your distributions paid for qualified medical expenses, the taxable amount will be zero.

Step 5: Transfer Information to Form 1040

The deduction or taxable amount calculated on Form 8889 carries over to your Form 1040. Attach Form 8889 to your tax return.

Step 6: File Your Return

File your complete 2016 tax return by April 18, 2017, with Form 8889 attached. Keep copies of everything, including Form 1099-SA and all medical receipts, for at least seven years.

Common Mistakes and How to Avoid Them

Mistake #1: Not Reporting HSA Distributions at All

The Error: Thinking that because HSA distributions are "usually" tax-free, you don't need to report them.
Why It's Wrong: The IRS receives a copy of your Form 1099-SA. If you don't file Form 8889, they'll assume the entire distribution is taxable and send you a bill.
How to Avoid: Always file Form 8889 if you received a Form 1099-SA, even if all distributions were for qualified expenses.

Mistake #2: Using HSA Funds for Non-Qualified Expenses Without Reporting

The Error: Withdrawing HSA money for gym memberships, vitamins, or non-prescription medications, then not reporting it as taxable income.
Why It's Wrong: These aren't qualified medical expenses for 2016. You'll owe income tax plus a 20% penalty on these distributions.
How to Avoid: Only use HSA funds for IRS-approved qualified medical expenses. If you make a mistake, report the taxable portion on Form 8889, Part III.

Mistake #3: Claiming Medical Expenses Twice

The Error: Paying medical bills with tax-free HSA distributions AND deducting the same expenses on Schedule A as itemized medical deductions.
Why It's Wrong: This is double-dipping—you can't get two tax benefits for the same expense.
How to Avoid: If you used HSA funds to pay medical expenses, don't include those amounts in your Schedule A itemized deductions.

Mistake #4: Losing or Throwing Away Receipts

The Error: Not keeping documentation proving your HSA distributions paid for qualified medical expenses.
Why It's Wrong: The burden of proof is on you. If audited without receipts, the IRS will treat distributions as taxable.
How to Avoid: Keep detailed records for every HSA withdrawal—receipts, Explanation of Benefits (EOB) statements, prescriptions, and invoices. Store them for at least seven years.

Mistake #5: Reporting Under the Wrong Social Security Number

The Error: Married couples mixing up which spouse's Social Security Number should be on Form 8889.
Why It's Wrong: The SSN must match the HSA account beneficiary. If both spouses have separate HSAs, each must file their own Form 8889.
How to Avoid: Check that the SSN on Form 1099-SA matches the SSN on your Form 8889. If married filing jointly with two HSAs, complete separate Forms 8889 for each account.

Mistake #6: Forgetting About the Testing Period

The Error: Using the "last-month rule" to maximize 2016 contributions, then losing HSA eligibility in 2017 before December 31, 2017.
Why It's Wrong: You'll have to include contributions in income and pay a 10% additional tax.
How to Avoid: If you used the last-month rule for 2016 contributions, remain HSA-eligible through December 31, 2017 (the testing period).

What Happens After You File

Immediate Processing

The IRS receives your tax return with Form 8889 attached. They match the information on your Form 8889 against the Form 1099-SA your HSA trustee filed. If everything matches and your return is complete, your return processes normally.

If You Owe Tax

Any taxable HSA distributions appear as "other income" on your Form 1040. You'll pay ordinary income tax at your marginal rate, plus a 20% additional tax if you're under age 65 and the distribution wasn't for qualified medical expenses, disability, or death. This increases your overall tax liability.

If You Get a Refund

Legitimate HSA deductions reduce your taxable income and may increase your refund. If you made contributions to your HSA during 2016, those contributions could lower your tax bill.

Potential IRS Correspondence

The IRS may send you a notice if:

• You didn't file Form 8889 but they received a Form 1099-SA with your SSN
• Numbers don't match between forms
• They have questions about whether distributions were for qualified expenses

Audit Possibility

HSA accounts can be selected for audit. If this happens, you'll need to provide documentation proving your distributions paid for qualified medical expenses. The IRS generally has three years from your filing date to audit, though this extends to six years if they suspect substantial underreporting.

State Tax Implications

Most states follow federal HSA rules, but California and New Jersey do not recognize HSAs for state tax purposes. If you live in these states, you may have different state tax reporting requirements.

Future Years

Any unused money in your HSA rolls over to 2017 and future years. There's no "use it or lose it" rule for HSAs. You can continue taking tax-free distributions for qualified medical expenses indefinitely, even if you're no longer HSA-eligible or have retired.

FAQs

Q1: I received Form 1099-SA but I only used my HSA for doctor visits and prescriptions. Do I still need to report it?

Yes. Even if all your distributions were for qualified medical expenses and won't be taxed, you must still complete Form 8889 and attach it to your Form 1040. The IRS needs to see that you properly accounted for the distributions shown on Form 1099-SA. On Form 8889, you'll show the distribution amount was used entirely for qualified expenses, resulting in zero taxable income.

Q2: What if I spent HSA money on something that wasn't a qualified medical expense?

You must report the non-qualified distribution as taxable income on Form 8889, Part III. You'll owe ordinary income tax on that amount, plus an additional 20% tax (unless you're 65 or older, disabled, or deceased). For example, if you withdrew $1,000 for a vacation and you're in the 25% tax bracket, you'd owe $250 income tax plus $200 additional penalty tax, totaling $450.

Q3: Can I take money out of my HSA to reimburse myself for medical expenses I paid out-of-pocket years ago?

Yes, but only if the expenses were incurred AFTER you established your HSA. According to IRS rules, there's no time limit for reimbursing yourself for qualified medical expenses. However, you must have documentation proving the expense occurred after your HSA was established and that you never reimbursed yourself before. This is why keeping detailed records is crucial.

Q4: I'm 66 years old and on Medicare. Are my HSA distributions still tax-free?

Yes, as long as you use them for qualified medical expenses. Being over 65 means you avoid the 20% additional tax even if you use HSA funds for non-medical expenses (though you'd still owe ordinary income tax). Many retirees strategically use HSAs as supplemental retirement accounts since the penalty disappears at 65.

Q5: My HSA provider charged me monthly maintenance fees. Do those fees show up on Form 1099-SA?

No. Account maintenance fees, investment fees, and similar administrative charges typically don't appear on Form 1099-SA because they're deducted directly from your account balance rather than distributed to you. Only actual distributions (money that left your HSA and went to you or a medical provider) appear on Form 1099-SA.

Q6: What's the difference between Form 1099-SA and Form 5498-SA?

Form 1099-SA reports distributions (money OUT of your HSA). Form 5498-SA reports contributions (money INTO your HSA) and your year-end account balance. You'll receive both forms if you made contributions and took distributions during 2016. You need Form 1099-SA to complete Form 8889, Part II. Form 5498-SA helps verify contribution amounts for Form 8889, Part I.

Q7: I mistakenly withdrew money from my HSA thinking an expense was qualified when it wasn't. Can I put the money back?

The 2016 Instructions for Forms 1099-SA and 5498-SA address "mistaken distributions." If you reasonably but mistakenly believed an expense qualified, you can return the mistaken distribution to your HSA by April 15 following the year you discovered the mistake. Your HSA trustee may or may not allow this—it's their choice. If they accept the return and you meet the conditions, the distribution isn't taxed and the repayment doesn't count toward contribution limits. The trustee should not report this on Form 1099-SA or should issue a corrected form.

Sources

Important Resources:

• IRS Form 1099-SA (2016)
• Instructions for Forms 1099-SA and 5498-SA (2016)
• IRS Publication 969 (2016)
• Form 8889 and Instructions (2016)
• IRS Publication 502 - Medical and Dental Expenses (2016)

This guide is for informational purposes only and does not constitute tax advice. For specific tax situations, consult a qualified tax professional or contact the IRS directly.

‍