1099-SA: Everything You Need to Know
Form 1099-SA is used by the Internal Revenue Service (IRS) for the reporting of any distributions made from a health savings account or medicals savings account.4 min read
2. Parts of Form 1099-SA
3. Items Reported on Form 1099-SA
4. Distribution Codes Under Form 1099-SA Box 3
5. Can Anyone Contribute to a Health Savings Account (HSA) or Medical Savings Account (MSA)?
6. Plan Tax Benefits of Health Savings Accounts (HSA) and Medical Savings Accounts (MSA)
What Is Form 1099-SA?
Form 1099-SA is used by the Internal Revenue Service (IRS) for the reporting of any distributions made from a health savings account or medicals savings account. Form 1099-SA will be provided to the employee if that employee was the recipient of health savings account or medical savings account distributions in that tax reporting year. In other words, the purpose of the Form 1099-SA is to detail any funds that have been distributed from your health savings plan that tax year.
Health savings account distributions can generally occur when an employee uses a health savings account to pay for allowable medical expenses, for an employee who has cashed out the health savings account balance, or for an employee seeking to reimburse oneself for allowable medical expenses. If one of these situations occurs, the health savings account custodian bank will provide the employee with the specific information surrounding the distribution so that the employee will be able to complete IRS Form 8889 with their individual tax return. Form 1099-SA functions as a control mechanism to track the funds that have left an employee’s health savings account, while Form 8889 is a verification mechanism to ensure that the health savings account monies were spent in accordance with the allowances. In the event of an IRS audit, a taxpayer may be asked to demonstrate via receipts that all expenses were allowable under HSA regulations.
Parts of Form 1099-SA
Form 1099-SA is a two-part form broken down into a left side and a right side. The left side contains information about the bank that acted as trustee and any account information, while the right side includes a variety of information related to the amount of distribution, taxation, and classification.
Items Reported on Form 1099-SA
The following items are generally reported within Form 1099-SA:
- Box 1: Gross distribution – This box details the entire amount that was distributed from the taxpayer’s health savings account in the respective tax year.
- Box 2: Excess contribution earnings – The amount detailed in this box reflects those earnings that accrued as a result of annual contributions made in excess of regulatory limits.
- Box 3: Code of Distribution – This is an identifier that reflects the manner in which the funds were distributed. Examples of some codes are disability, death, normal distribution, and prohibited transactions.
- Box 4: Fair Market Value of account on death – This box details the fair market value amount of the savings account at the time of death.
- Box 5: This is a checkbox that details whether the account is a health savings account, MA MSA, or Archer MSA; the box will detail the type of account from which a distribution was made in the tax year.
The information populated on Form 1099-SA will form the basis of the information needed to be entered on Form 8889.
Distribution Codes Under Form 1099-SA Box 3
Form 1099-SA is a form that contains a number of boxes providing detailed information about the taxpayer’s health savings distributions. Box 3 of Form 1099-SA details six distribution codes. Each Form 1099-SA is restricted to one health savings account and only one specific distribution code. As such, a taxpayer may receive more than one Form 1099-SA, depending on the circumstances. The purpose of this is to allow the IRS the ability to differentiate between the tax treatments afforded to different distribution types in a taxpayer’s health savings account. The following are the six distribution codes associated with Form 1099-SA Box 3:
- Normal distributions – a code used to identify those distributions for the taxpayer (e.g., getting reimbursed for a qualified medical expense) or any payment that is made directly to a medical professional. In addition, a normal distribution code is used if no other distribution code will apply to the taxpayer’s situation.
- Excess contributions – if a taxpayer has contributed in excess to their health savings account and proceeds to remove those excess contributions to avoid a tax penalty, the removal of those funds will be flagged by this code.
- Disability code – used to identify those distributions made from a health savings account after the taxpayer has been disabled. By using this distribution code, the amount will flow into Line 17a of Form 8889.
- Death distribution code – used to identify those distributions that were paid to the estate of a taxpayer who has died during that tax year.
- Prohibited transaction code – will identify any distributions that were not allowable under regulations or were made in error.
- Like distribution code 4 – this code reflects distributions made to a beneficiary in the event of death that was not a spouse.
Can Anyone Contribute to a Health Savings Account (HSA) or Medical Savings Account (MSA)?
Every individual is not afforded the right to contribute to a health savings account or medical savings account. Generally, in order to qualify, an individual must be presently covered by a health plan with a high deductible, cannot be a Medicare enrollee, and is not eligible for declaration as a dependent on another taxpayer’s filing.
Plan Tax Benefits of Health Savings Accounts (HSA) and Medical Savings Accounts (MSA)
Employees who are eligible to contribute to a health savings or medical savings account are positioned via the tax law to save quite a bit of tax money, both in immediate and future terms. The employee is allowed to deduct any contributions made to the health savings account in the year in which the contributions were made, and the employee may roll over any remaining balances for use at some point in the future. These rollover balances can even be invested to earn additional income from the balance that will not be subjected to taxation, as long as the money is spent on allowable medical expenses. An individual may use a health savings account to make distributions without taxation if those funds are used for allowable medical expenses. The individual will receive Form 1099-SA to reflect the exact amount of distributions received from the health savings account in the given tax year.
If you need help understanding Form 1099-SA, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers from UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.