As HSA-eligible health plans become more popular, there are a few important things taxpayers need to know about filing taxes with a health savings account.
What is an HSA again?
A health savings account is like an emergency fund specifically for qualified medical expenses—and it's full of tax advantages. You may be able to contribute to an HSA if you're enrolled in a high-deductible health plan through your employer or purchase an HSA-eligible plan through the health insurance marketplace.
If you contribute to or make withdrawals from your HSA in a tax year, you'll need to be on the lookout for 2 separate HSA tax forms.
What to know about Form 8889
In order to enjoy the full tax benefits of an HSA and stay compliant with IRS rules, you need to complete and file Form 8889 each year you contribute to or distribute money from your HSA.
This form allows you to claim a tax deduction for any HSA contributions you made outside of payroll deductions and ensures money withdrawn from your account was spent on qualified health care expenses. It's important to read the instructions on this form carefully, since the IRS uses terminology that's easy to confuse if you're in a hurry.
How to fill out Form 8889
Crucially, on line 2, the IRS asks you to report contributions you made for 2023, or contributions made on your behalf, but that doesn't include any money you contributed through payroll deductions. Instead, it's asking how much you contributed outside of payroll deductions. This will be used to figure any additional tax deduction you may be eligible for, since these contributions were not made on a pre-tax basis, and ensure you didn't exceed your annual contribution limit.
Reminder: The HSA contribution limits for 2023 are $3,850 for self-only coverage and $7,750 for family coverage. Those who are 55 and older and not enrolled in Medicare can contribute an additional $1,000 as a catch-up contribution. If you're married and your spouse is also eligible for and wants to make a catch-up contribution, it must be done in a separate HSA. If your contributions exceed annual limits, they must be removed from the account before the tax deadline (April 15, 2024) or you could incur a 6% penalty on the excess contribution.
Line 9 on Form 8889 is where you report contributions to an HSA that were made through payroll deductions. But that's not all—you should also include contributions from your employer, if any, here. Don't be intimidated by line 9 asking only for "employer contributions." technically, all HSA contributions made through payroll deductions are considered "employer contributions." You can find this total on your W-2, Wage and Tax Statement, in box 12 with the code W.
The second section on Form 8889—HSA Distributions—is where you report the total amount of money taken out of your HSA in 2023 and how much of it was spent on qualified medical expenses. If you have family coverage, this includes distributions that were used for you, your spouse, and your dependents. You can find this total on Form 1099-SA, which HSA administrators are required to send out by late January. If you didn't receive yours, contact your HSA administrator or your employer's HR department.
What to know about Form 5498-A
Since contributions for 2023 can be made to HSAs up until the federal tax deadline, HSA administrators aren't required to send out Form 5498-SA, which is an informational document showing your total contribution amount, until May. If you have an online account, however, you should be able to log in to see your total contributions for the year. If you do receive Form 5498-SA, you're not required to file it with your taxes.
The final section on Form 8889 is where you report any qualified funding distributions—aka rollovers—that you made from a traditional or Roth IRA to an HSA and calculate additional taxes that may be owed for things like overfunding your account. (Note that these can only be done once in a lifetime.)
Finally, attach your completed Form 8889 to your federal tax return. You don't need to send in receipts to prove your HSA funds were spent on qualified medical expenses, but you should keep them for your records for at least 3 years in case you are audited.
4 HSA tax benefits you don't want to miss
It's hard to overstate the power of a health savings account. Here are 4 major tax benefits that make HSAs one of the best tools for making a plan for future and current qualified medical costs.
1. You can save more thanks to a triple-tax advantage.
Contributing to an HSA helps you save more over time with a triple-tax advantage: tax-advantaged contributions, tax-deferred earnings (if invested), and tax-free withdrawals for qualified health care expenses.1 Many people contribute to HSAs through payroll deductions, which means the money is set aside before it's subject to income taxes.
If you enroll in an HSA-eligible health plan through the health insurance marketplace, rather than through an employer, you may not be able to make the same type of pre-tax contributions as you would through an employer-sponsored HSA. However, you will still be able to claim a tax deduction at the end of the tax year for money you added to your HSA up to the annual limit.
Once your account is funded, you may be able to invest a portion of it, or even all of it, for potential growth. Investment options and minimums vary by HSA administrator, but many offer stocks, bonds, ETFs, mutual funds, and more.
Unlike a taxable brokerage account, any gains from investments you sell will not be subject to federal taxes. Instead, the money will be deposited into your HSA tax-free and available to spend on qualified medical expenses. Note that if you're over 65, you can spend your HSA dollars on nonqualified expenses, but you'll face ordinary income tax on the distribution, like a traditional IRA. If you're under 65, HSA dollars spent on non-qualified expenses would incur a 20% penalty.
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2. Your employer may contribute too.
Nearly 3 in 4 employers with an HSA program make contributions to individual employees' HSAs.2 Much like a 401(k)-matching program, the money is yours to invest or spend on qualified medical expenses. You won't get a tax deduction for your employer's contributions, the amount your employer contributes will reduce what you can contribute for the year, and employer contributions are excluded from your gross income, but it's hard to argue with free money. There's no vesting period, the money your employer contributes to your HSA is yours from day one. And if you leave your employer, the account goes with you.
3. HSA funds never expire.
Unspent HSA funds have the potential to grow year after year, with no expiration date. If your HSA earns savings interest or a portion of your balance is invested, that money can be reinvested, potentially compounding the growth of your account. Over 30 years of contributing and investing the 2023 HSA family maximum contribution, you could end up with over $650,000, assuming a 6% rate of return.3 And after age 65, there's no longer a 20% penalty on distributions used for nonqualified expenses, so you can use your funds for everyday expenses if needed, just remember that those withdrawals will be taxed as ordinary income.
4. HSA funds are not subject to RMDs.
In some ways, the tax treatment of HSAs resembles that of other tax-deferred accounts like 401(k)s and IRAs. But HSAs have a distinct benefit for retirees: no required minimum distributions. Typically when you reach age 73, you are required to begin taking a minimum withdrawal from your tax-deferred accounts. Those distributions, known as RMDs, are included in your income and can lead to a hefty tax bill (though there are ways to reduce the tax burden). HSAs never require distributions, making them one of the most flexible accounts for retirement income planning.
An HSA can help you save for medical costs now and in the future
HSAs are a great tool for medical expense planning, now and in the future. The tax benefits, combined with investment opportunity and portability, make HSAs an increasingly popular option for individuals and families alike. Understanding the annual tax reporting requirements ensures you're getting the most from your HSA.