Written by a TurboTax Expert • Reviewed by a TurboTax CPAUpdated for Tax Year 2023 • May 30, 2024 12:47 PM
OVERVIEW
When you use the funds from a Health Savings Account (HSA), or a medical savings account (MSA) such as an Archer MSA or Medicare MSA, the institution that administers the account must report all distributions on Form 1099-SA.
TABLE OF CONTENTS
- Savings accounts for healthcare
- Can anyone contribute?
- Plan tax benefits
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Key Takeaways
- Health Savings Accounts (HSAs) and Medical Savings Accounts (MSAs) are tax-advantaged accounts that can be used to pay for qualified medical expenses.
- Contributions to HSAs and MSAs are tax-deductible and the unspent balances can rollover indefinitely from year to year.
- Distributions from HSAs and MSAs that are not used for qualified medical expenses are subject to income tax and an additional 20% tax.
- When filing taxes, you must report taxable distributions from HSAs and MSAs on your tax return and calculate the additional 20% tax on the taxable portion of your distributions.
Savings accounts for healthcare
Several tax incentives are available for you to save money on medical care costs. You could get a Health Savings Account (HSA), or a medical savings account (MSA) such as an Archer MSA or Medicare MSA. When you actually use those funds, the institution that administers the account reports the distributions on Form 1099-SA.
Can anyone contribute?
Only certain individuals are eligible to contribute to an HSA or MSA. You have to be covered under a High Deductible Health Plan (HDHP) (with no coverage under a non-HDHP health plan), you cannot be enrolled in Medicare and cannot be eligible to be claimed as a dependent on another person’s return. If you are employed, your employer can make tax-free contributions as well.
Plan tax benefits
If you make contributions to one of these accounts, you stand to save a significant amount of money in taxes both in the short and long term. Not only can you deduct contributions you make to your account in the year made, but the unspent balances can rollover indefinitely from year to year. These balances can be invested and the earnings from these investments will never be taxed so long as withdrawals are spent on qualifying health expenses.
As needed, you can take tax-free distributions from your account to pay for qualified medical expenses of the account beneficiary or the beneficiary’s spouse or dependents. You will receive a Form 1099-SA that shows the total amount of your annual distributions (i.e. money you used) reported in box 1. Provided you only use the funds to pay qualified medical expenses, box 3 should show the distribution code No. 1, which indicates normal tax-free distributions.
TurboTax Tip:
Earnings from investments in HSAs and MSAs are never taxed as long as withdrawals are spent on qualifying health expenses.
Qualified medical expenses
None of the money received from these plans is taxable if it is spent on "qualified" medical expenses. If the money you withdraw exceeds your qualified medical expenses, however, the excess is subject to income tax. The IRS does not provide an exhaustive list of qualified medical expenses, but it does state an expense is qualified if the taxpayer could report it as an itemized deduction on Schedule A. As a general guideline, the expense should cover the cost of diagnosing, preventing, curing, mitigating or treating a disease. The cost of medical treatment that affects any part of the body is also considered a qualified expense.
If you get a distribution code No. 5 in box 3 of a 1099-SA, it means you did not use all distributions from your account for qualified medical expenses. That means you must report at least some of the distribution as income on your tax return.
HSA distributions
The IRS requires you to prepare Form 8889 and attach it to your tax return when you take a distribution from an HSA. However, if your 1099-SA indicates you did not use the distribution for qualified medical expenses, you will pay income tax on the portion you used for nonqualified expenses. You report the taxable amount on the “other income” line of your tax return and write “HSA” beside it. You will also have to pay an additional tax of 20 percent on the taxable portion of your distribution, which you’ll calculate on Form 8889. (TurboTax will handle the calculations and fill in all the right forms for you.)
MSA distributions
MSA distributions not used for qualified medical expenses are subject to the same tax consequences as HSAs. You report taxable and tax-free distributions on Form 8853, and calculate the 20 percent additional tax on the taxable portion of your distributions directly on the form. Taxable MSA distributions are reported on your tax return the same way that HSAs are, but the notation you make on the “other income” line should be “MSA.” (Again, TurboTax will fill in the right forms for you.)
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