If you participate in a High Deductible Health Plan (HDHP), you have the opportunity to take advantage of a federal income tax break by saving and paying for health care expenses through a Health Savings Account (HSA). Contributions you make to your HSA are deductible from your gross income, earnings on your HSA funds grow tax-free, and withdrawals used to pay for qualified medical expenses are tax-free.
HSAs might be established by employers for their employees, or by individuals outside of an employer-based plan. Regardless of whether your HSA is through your employer or established individually, you will be responsible for some reporting and record keeping requirements. These tasks are not extensive or burdensome, but must be followed so that you receive the tax advantages that the HSA offers.
Reporting HSA contributions. IRS Form 8889 is the key reporting vehicle for HSAs. Form 8889 is used to report HSA contributions, figure your HSA deduction, and report any HSA distributions. Contributions you make, and those made by anyone else on your behalf, including contributions made by your employer, must be reported. Employer contributions will be shown in Box 12 of your W-2, and will be coded with a “W.” You also will receive a Form 5498-SA from the HSA trustee, which will show the amount contributed to your HSA during the year, from all sources. You must file a Form 8889 with your federal income tax return if, during the taxable year, contributions were made to your HSA, you received distributions from your HSA, or you acquired an interest in an HSA due to the death of an HSA account beneficiary.
Figuring your HSA deduction. Form 8889 instructions walk you through the process of calculating the deduction allowed for HSA contributions. The amount of your deduction is limited to the IRS maximum (up to $3,000 individual/$5,950 family for 2009), and is reduced by any HSA contributions made by your employer. You enter the deductible amount as an adjustment to your gross income on your federal income tax return. If both you and your spouse have an HSA, IRS Publication 969 explains how to handle the reporting for this situation. You also use Form 8889 to calculate whether excess contributions were made to your HSA. Excess contributions receive no tax preference and generally are subject to a 6% excise tax (unless timely withdrawn). Excess contributions, if made by your employer and not included in Box 1 of your W-2, should be reported as “Other income” on your federal income tax return.
Reporting HSA distributions. The HSA trustee reports distributions on IRS Form 1099-SA. HSA distributions used to pay for qualified medical expenses are free from tax. However, you still must report these on Form 8889. Distributions used for something other than qualified medical expenses are taxable, and subject to a 10% additional tax. Report taxable HSA distributions as “Other income” on your federal income tax return. Use Form 8889 to calculate the additional 10% tax, and report this in the “Other tax” section of your federal income tax return.
HSA Recordkeeping. According to IRS Publication 969, HSA accountholders must keep records sufficient to show that:
- HSA distributions were used to pay for or reimburse qualified medical expenses;
- The qualified medical expenses paid from the HSA were not paid for or reimbursed from another source; and
- The qualified medical expenses paid from the HSA were not itemized as a medical deduction in any previous year.
You should retain the paperwork verifying you have met these requirements, however, do not file the paperwork along with your federal income tax return.
State Tax Reporting/Record Keeping Requirements. These will vary by state. Review the instructions on your state income tax return, or check with your tax preparer.
Compliance with these reporting and record keeping requirements will help ensure your HSA provides the intended tax benefits.