Recent COVID-19 Regulations: Information and Solutions To Help

Don’t Forget to Complete Form 8889 if You Have HSA Activity

Tax forms on a table with a phone and pen on the forms

“You’re required to complete and submit Form 8889 if you contribute to or distribute funds from your account, if you weren’t eligible to fund your account all 12 months of the calendar year 2020 (remember, Health Savings Account activity is tracked on the calendar year, regardless of your medical-plan renewal date), or if you inherited an interest in an account in 2020.”

William G. (Bill) Stuart

Director of Strategy and Compliance

March 4, 2021

Tax reporting isn’t difficult with a Health Savings Account. The key is knowing what you need to file and why.

I’ve always found tax compliance easy in the dozen years that I’ve owned a Health Savings Account. I use tax software to complete my joint tax return. The program asks me whether I have an account and then customizes my questionnaire to capture the right information to fill in the form. Easy.

The purpose of Form 8889 is to report contributions, figure your tax deduction, report distributions, and determine the tax and penalty to be applied to any contributions you make in excess of your prorated ceiling if you lose your eligibility to fund your account during the calendar year.

My Form 8889 is never too exciting. I’ve always contributed via pre-tax payroll deductions through my employers’ Cafeteria Plans, so I capture my tax savings every two weeks rather than when I file my taxes. And I’ve never lost my eligibility to fund my account or inherited a Health Savings Account. This year’s a little different because we deposited $1,000 into an account that my wife owns, and I need to add another $200.16 to my account because I miscalculated my payroll deductions. We’ll secure the tax benefits when we file the return, although my employer and I will never recover the $15.30 in payroll taxes that we each would have saved if I’d deposited that additional $200.16 through the Cafeteria Plan. (We couldn’t save the $76.50 that we paid in payroll taxes on the $1,000 that we contributed to her account.)

For those of you who play this game at home, the Internal Revenue Service provides straightforward instructions on how to complete Form 8889.

Who Must File Form 8889?

You’re required to complete and submit Form 8889 if you contribute to or distribute funds from your account, if you weren’t eligible to fund your account all 12 months of the calendar year 2020 (remember, Health Savings Account activity is tracked on the calendar year, regardless of your medical-plan renewal date), or if you inherited an interest in an account in 2020.

What’s the Purpose of Form 8889?

The form is designed to complete the tax implications of owning and funding your Health Savings Account. You probably make pre-tax payroll contributions and perhaps receive an employer deposit as well. This activity is recorded in Box 12 of your Form W-2 that your employer sent by Jan. 31. Box 12 is the catch-all part of the form that typically lists three or four figures with codes indicating which figure reflects your share of your medical premium, your Health FSA contributions, and your total funding of your employer-sponsored retirement account. the entry for Health Savings Accounts sums your company’s contribution and your pre-tax payroll deductions into a single figure that’s labeled an employer contribution. Don’t worry about trying to disaggregate the figure into what you deposited and what the company added. It’s not relevant.

Information that You Need to Complete Form 8889

Your Health Savings Account administrator should have sent (or posted on your account) Form 1099-SA by Jan 31. This form sums your distributions from the account during the calendar year. Remember, your administrator doesn’t substantiate withdrawals, so you must know and self-report (using the honor system) any distributions for non-qualified expenses.

You also need to know total contributions from all sources. If your only deposits were via pre-tax payroll deductions, you can rely on the figure in Box 12 of Form W-2. In my case, we must add $1,200.16 to that figure. Your administrator must post Form 5498-SA to your account or send it to you by May 31 because you can fund your account until the day that you file your tax return, (up to April 15 of the following year). Many administrators, including Benefit Strategies, post a Form 5498-SA to your online portal by Jan. 31 and amend it only if you make a subsequent personal contribution for 2020 in early 2021. If you contributed outside a Cafeteria Plan and your administrator doesn’t issue the form in time for you to complete your taxes, you can log onto your online account and sum the personal contributions.

(By the way, the “SA” suffix on these two forms stands for Health Savings Account. Many investment account administrators must issue Form 1099 and Form 5498. You may see a Form 1099-D or Form 1099-INT among your tax documents.)

Instructions

The IRS publishes instructions that are easy to follow. And the form itself is intuitive. Points to remember:

  • Part I summarizes your contributions and the amount that’s not includable in your taxable income.
  • On Line 2, include only personal contributions (deposits you make outside a Cafeteria Plan). Pre-tax payroll deductions and employer contributions were deposited before taxes were applied. If you’re not sure whether you made personal contributions, you can view a preliminary Form 5498-SA if your administrator issues one or view your online account and look for any deposits other than payroll deductions.
  • On Line 9, include the amount contributed by you and your employer through a Cafeteria Plan. This amount is one of the coded figures on Box 12 of your Form W-2. All contributions through the Cafeteria Plan – even your pre-tax payroll deductions – are labeled employer contributions. The distinction between funds that you and your employer deposited isn’t relevant for tax purposes.
  • Part II calculates any taxes and penalties for non-qualified distributions. You list your total distributions (Form 1099-SA) on Line 14a.
  • On Line 15, you self-attest to the dollar amount of distributions that were for qualified expenses. You don’t have to submit receipts with your tax return, but be sure to maintain records to substantiate this dollar amount in case your tax return is audited.
  • Line 16 is the difference between total distributions and withdrawals for qualified expenses. You must add this figure to your taxable income.
  • If you’re under age 65 and not disabled, and if Line 16 is greater than $0, you must multiply that figure by 20% to calculate the additional tax (penalty) for withdrawing funds for non-qualified expenses.
  • Part III applies only if you weren’t eligible to fund your account for all 12 months of 2020. You must prorate your contribution if you lost eligibility before December 1. If you weren’t eligible for part of the year but were as of December 1, you can pro-rate your contribution or contribute to the 2020 limit for your contract type and age. If you choose the latter option, you must remain HSA-eligible through the end of 2021 to avoid taxes and penalties on 2020 contributions beyond the prorated ceiling.
  • Finally, if both people who file a joint tax return contribute to a Health Savings Account, the couple must file two Form 8889s to reflect teach person’s activity. That’ll be a new experience for my wife and me this tax season.

The Bottom Line

Completing Form 8889 isn’t difficult. Tax software allows you to do so quickly. But even if you (or your tax preparer) fill out your tax return, this form is intuitive and the instructions clear. It should take all of 10 minutes to fill it in.

What We’re Reading

As COVID-19 vaccine production and distribution continue their three-month ramp-up, more Americans are reporting that they’re less reluctant to receive the vaccine. That’s good news. The Kaiser Family Foundation reports here.

Short-term, limited-duration medical plans remain controversial. But an early fear of critics – that their expansion would reduce enrollment in more comprehensive ACA-sanctioned plans in government-facilitated marketplaces – hasn’t materialized, according to a leading health economist.

If you’re over age 65 and have deferred Medicare enrollment to continue to fund a Health Savings Account, beware of the Part A six-month retro rule. It may result in your inadvertently overfunding your account.

2 thoughts on “Don’t Forget to Complete Form 8889 if You Have HSA Activity”

  1. Steve Ferguson says:

    Looking for my 1099-SA form to fill out Turbo-Tax information. Did one get sent out? My work email address is XXXXX.com and I work for XX XXXX North America.

    Where do I get this form, or a summary of HSA charges on my HSA card. Thank you,

    ~Steve Ferguson

    1. Bill Stuart says:

      I deidentified your business contact information in case you’re merely trying to drum up business. Form 1099-SA is produced and distributed by Jan. 31 for the prior tax year (just like form W-2, which your employer provides by the same date).

      Most Health Savings Account providers post it on your online portal and inform you via e-mail that it’s available. The form will list total distributions, but won’t itemize or determine which are qualified and which aren’t. You can review your online account to see itemized expenses. You’ll never receive information showing which expenses are qualified (tax-free) and which aren’t (fix them promptly, find other qualified expenses to offset them, or pay taxes and penalties).

      If your debit card is restricted to items that are typically qualified (like a prescription, a once-documented recurring chiro or orthodontic payment, or a over-the-counter allergy treatment), you’re unlikely to have a non-qualified expenses paid with your Health Savings Account debit card. But if the card is open (you can purchase anything, qualified or not qualified), you need to examine each transaction and put it in a “qualified” or “non-qualified” bucket, then report the results on your tax return.

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