Sorting through Tax Forms

Tax Forms on desk with pen

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“All contributions made through your employer’s Cafeteria Plan are labeled employer contributions. This figure includes not only contributions that your employer agreed to make when you enrolled, but also your pre-tax payroll deductions. Don’t worry about the aggregation. It’s all your money. Health Savings Account contributions vest immediately, regardless of the source.”

William G. (Bill) Stuart

Director of Strategy and Compliance

February 19, 2020

It’s tax time. And if you’re like most Americans, in late January your mailbox was chock full of envelopes that included the phrase Important Tax Documents Enclosed. ‘Tis the season. Which ones are relevant to your (or your clients’) Health Savings Account?

Cafeteria Plan

Quick lesson. You’ll see references below to your employer’s Cafeteria Plan. This term has nothing to do with nutrition. Rather, a Cafeteria Plan (sometimes called a Section 125 Plan to reflect the applicable section of the federal tax code) is simply a document that your employer maintains that allows workers to fund certain employee benefits with pre-tax payroll deductions. It almost always includes your share of your medical premium, as well as other benefits like a Health FSA, Dependent Care FSA, and contributions to a Health Savings Account.

Form W-2

Your employer is responsible for sending your Form W-2 by January 31. This document lists your taxable income and taxes withheld from your paycheck. It may be confusing, as it often includes several different taxable-income amounts.

You need to focus on Box 12 to report your Health Savings Account activity properly. Your Box 12 may include multiple dollar figures, each with a code indicating that the amount represents. You’re looking for a dollar amount with the code HSA. That figure represents total employer contributions to your account through the payroll system during 2019.

All contributions made through your employer’s Cafeteria Plan are labeled employer contributions. This figure includes not only contributions that your employer agreed to make when you enrolled, but also your pre-tax payroll deductions. These two sources of funds are combined into a single figure.

Don’t worry about the aggregation. It’s all your money. Health Savings Account contributions vest immediately, regardless of the source (although sometimes employers can reverse mistaken contributions). That means that once the money’s in your account, it’s no longer labeled employer or employee contribution. You don’t have to remain with the company a set number of years to receive all the money that your employer contributes, as you do with employer-sponsored retirement plans.

You need to make sure that Box 12 reflects accurately the total deposits into your Health Savings Account through your company’s payroll system. If your employer contributes $1,500 and you deposited $100 per biweekly pay period, the figure should be $4,100. If it’s not, you need to see your employer.

Form 1099-SA

If you’re an investor, you may be familiar with Form 1099. It reflects total distributions from an account in a calendar year. The figure is a single aggregated number, not a list of withdrawals. And it’s important to understand that Form 1099-SA (the SA designates it as a form for Health Savings Accounts) that this single figure aggregates distributions for both qualified and non-qualified expenses.

That’s because your account provider doesn’t substantiate all withdrawals, as it does with a Health FSA or a Dependent Care FSA. Participants in those programs can’t withdraw funds for anything other than qualified expenses. But Health Savings Account owners can make distributions for any expense at any time (subject to taxes and penalties if the withdrawal doesn’t reimburse a qualified expense). Neither your employer nor your account provider can require substantiation.

So, you’re on your own to determine how much of the figure reflected on Form 1099-SA is for qualified expenses. You probably limit your distributions to qualified expenses, so the entire amount is tax-free. But the onus is on you to know whether you spent all your withdrawals on qualified expenses.

Your account provider mailed you a copy of this form by January 31 or posted it on your online account by that date.

Form 5498-SA

This form reflects all contributions to your Health Savings Account during the calendar year and the fair market value of the account as of the date the form was prepared. You need to know your total contributions to your account to complete your tax return. If all the money that flowed into your account went through a Cafeteria Plan, the figure in Box 12 of Form W-2 reflects your activity accurately.

Your account provider doesn’t deliver a final version of this form until May 31. That’s because you can contribute to your Health Savings Account up to the earlier of the date that you file your income taxes or the date that your return is due (usually April 15). Learn more about contributing for a prior year in my articles here and here.

Many account providers post a preliminary Form 5498-SA on your online account by early February to help you prepare your tax return. They then create a corrected version when you make a contribution for the prior tax year, or create a final version of the form by May 31. You should be able to find your total prior year contributions at any time by logging into your online account or mobile app.

Form 8889

This is the actual document that you include with your personal income tax return. It’s a one-page, two-sided document  that reflects account activity. It enables a tax deduction for personal contribution (outside a Cafeteria Plan) and assesses a penalty for distributions that you admit were for non-qualified expenses. It produces a bottom-line number that you plug in to Line 12 of Schedule 1 Schedule 1 aggregates a number of items that are tax-deductible. You then plug that total into Line 8a of your Form 1040 to deduct the amount of your aunt’s and any other personal contributions from your taxable income.

It sounds complicated. But it really isn’t. you just need copies of your Form W-2 and Form 1099-SA if all your contributions are through a Cafeteria plan. Simply feed these documents to your tax preparer or send answer correctly the questions that your tax software asks about your Health Savings Account. I use TurboTax® and find that prepares my returns accurately and easily by asking me a few simple questions about my account activity during the year.

Receipts

You don’t have to include receipts with your tax return. In this sense, your Health Savings Account reporting is similar to reporting unreimbursed business expenses, mortgage interest paid, or state and local income taxes paid. You provide the relevant dollar figures for these expenses on your income tax return, then retain the appropriate paperwork in your tax files. You need to refer to the file only if your personal income tax return is audited.

Maintaining records is a little more difficult than for other accounts. All distributions from a traditional 401(k) plan or traditional Individual Retirement Arrangement (IRA) are taxable. And most distributions from a Roth 401(k) plan or Roth IRA are tax-free. Documentation for reimbursements from these accounts is rarely required, except perhaps for allowable tax-free withdrawals from traditional accounts for first-time home buyers and a limited range of other qualified distributions.

Best of luck completing your 2019 tax returns! But you don’ really need luck – just a roadmap to guide you through the process of understanding forms and putting the right numbers in the right boxes. And now you have that map.

What We’re Reading

If you knew that you had medical coverage even if you didn’t enroll and pay a premium, why would you pay for coverage? Presidential candidate Pete Butitgieg’s plan would automatically enroll anyone without coverage – including small business employees whose company drops insurance to eliminate paying premiums – in a government medical plan. The newspaper The Hill asks “But if you know that the government will cover your bill if you are uninsured, why would you pay the premiums for your employee or private insurance plan?” Good question.

Is there a better way to pay for Medicaid enrollees’ care than the current system, in which the federal and state governments split the cost of every service delivered? Brian Blase, formerly President Trump’s healthcare advisor, thinks so. Learn about his proposal here to allow states to innovate, using federal grants to fund the program.

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