1099-SA Form: What It Is & Who Needs to File It?

When tax season rolls around, taxpayers receive various IRS forms related to their financial activities throughout the year. One such form, the 1099-SA, is essential for individuals who have withdrawn funds from certain tax-advantaged accounts designed for medical expenses. Understanding the purpose of this form, who needs to file it, and how to report it correctly can help taxpayers avoid penalties and ensure compliance with IRS regulations.

What Is the 1099-SA Form?

The 1099-SA Form, officially known as the Distributions from an HSA, Archer MSA, or Medicare Advantage MSA, is issued by a trustee or custodian of a Health Savings Account (HSA), Archer Medical Savings Account (MSA), or Medicare Advantage Medical Savings Account (MA MSA). This form reports the total amount of distributions taken from these accounts within a tax year.

Because these accounts are tax-advantaged, distributions must generally be used for qualified medical expenses to remain tax-free. If funds are used for non-medical purposes, they may be subject to income tax and additional penalties.

Who Needs to File a 1099-SA?

Taxpayers do not file a 1099-SA form themselves; instead, they receive it from their HSA or MSA provider if they took any distributions during the tax year. However, they must report the information on their personal tax returns. Here’s who should expect to receive a 1099-SA:

1. HSA Account Holders: If you withdrew money from your HSA to cover qualified or non-qualified medical expenses, your provider will send you a 1099-SA.
2. Archer MSA Account Holders: Those who used funds from an Archer MSA for medical expenses will also receive this form.
3. Medicare Advantage MSA Participants: If you have a Medicare Advantage MSA and used the funds, the IRS requires your provider to issue a 1099-SA.

Understanding the 1099-SA Sections

A 1099-SA Form contains key details necessary for accurate tax reporting. Understanding each section is crucial:

• Box 1: Gross Distribution – This box reports the total amount withdrawn from your HSA, Archer MSA, or MA MSA.
• Box 2: Earnings on Excess Contributions – If you contributed more than the allowed amount and later withdrew excess funds, any earnings on these excess contributions are reported here.
• Box 3: Distribution Code – This code explains the reason for the distribution (e.g., normal withdrawal, excess contribution withdrawal, disability, or death).
• Box 4: Federal Income Tax Withheld – If federal taxes were withheld from your distributions, the amount will be shown here.
• Box 5: Account Type – Indicates whether the account is an HSA, Archer MSA, or MA MSA.

How to Report 1099-SA on Your Tax Return

If you receive a 1099-SA, you must report the distribution on your tax return. The key form for this is IRS Form 8889 (for HSAs) or Form 8853 (for MSAs). Here’s how to handle it:

1. Determine if the Distribution Was for Qualified Medical Expenses
   • If all funds were used for qualified medical expenses, the amount is tax-free and just needs to be reported for documentation.
   • If any portion was used for non-medical expenses, that amount is subject to regular income tax and a potential 20% penalty (unless an exception applies, such as disability or death).
2. Fill Out IRS Form 8889 (for HSAs)
   • Report the total distribution amount from Box 1 on Line 14a.
   • Report the amount spent on qualified medical expenses on Line 15.
   • Any remaining amount is considered non-qualified and must be added to Line 16, where it will be taxed.
3. Use IRS Form 8853 (for Archer MSAs and MA MSAs)
   • Follow a similar process as Form 8889 but using Part II of Form 8853.

Tax Implications and Penalties for Misuse of HSA or MSA Funds

Using funds from an HSA, Archer MSA, or MA MSA incorrectly can lead to significant tax penalties:

• Non-Qualified Withdrawals: Any money spent on non-qualified expenses is subject to income tax and a 20% penalty.
• Excess Contributions: If you contribute more than the allowed limit ($4,150 for individuals and $8,300 for families in 2024 for HSAs), the excess must be removed to avoid a 6% excise tax.
• Failure to Report: Not reporting a 1099-SA correctly can lead to IRS penalties and potential audits.

Common Mistakes to Avoid When Filing a 1099-SA

Taxpayers often make errors when dealing with a 1099-SA. Here are some common mistakes and how to avoid them:

1. Not Reporting the Form: Even if all funds were used correctly, failing to report the form could raise red flags with the IRS.
2. Misreporting Non-Qualified Distributions: Some individuals mistakenly assume all distributions are tax-free. Carefully track medical expenses and report non-qualified withdrawals properly.
3. Ignoring Excess Contributions: If you exceed contribution limits and don’t correct it by withdrawing the extra amount, you could owe additional taxes.
4. Forgetting to Keep Receipts: In case of an IRS audit, you’ll need proof that distributions were used for qualified expenses.

How to Obtain a 1099-SA Form

If you took distributions from an HSA, Archer MSA, or MA MSA, your financial institution should send you a 1099-SA Form by January 31st of the following tax year. If you haven’t received it, check your online banking portal or contact your account provider.

Conclusion

The 1099-SA Form is an important tax document for individuals who have used funds from their HSA, Archer MSA, or MA MSA. While these accounts offer significant tax advantages, using funds improperly can lead to tax liabilities and penalties. By understanding how to read and report a 1099-SA, taxpayers can stay compliant and maximize their healthcare savings. If you have any doubts about how to handle your 1099-SA, consulting a tax professional can ensure that you file accurately and avoid unnecessary penalties.