HSA Frequently Asked Questions (FAQ)
G. Tax Implications
See also: HSA Tax Resources and Information
1. Will Nyhart ask me to substantiate that my withdrawals are for health expenses?
No. Nyhart will provide you with IRS Form 1099-SA by the end of January which reports distributions from your account, and IRS Form 5498-SA in mid-February which reports contributions made to your account. You are required to file Form 8889 with your federal tax return.
If the IRS requests substantiation, you must provide it or pay taxes and penalties on unsubstantiated withdrawals. Specifically, the IRS requires that you must be able to show that:
- Distributions were made exclusively to pay or reimburse qualified health expenses,
- The qualified health expenses had not been previously paid or reimbursed from another source, and
- The health expenses were not taken as an itemized deduction in any year.
2. Can I use my Health Savings Account to pay for non-health related expenses?
The HSA is designed to provide tax-free contributions to be made and used only for qualified health expenses.
If you are age 64 or younger, you can use the account for non-qualified purposes, however, IRS regulations stipulate that these withdrawals will be subject to income tax and an additional 20% tax penalty will apply.
If you are age 65 or older, you can use the funds in your HSA account for non-qualified purposes without penalty but would be responsible for paying income taxes on the amount used.
3. How does the HSA affect my taxes?
Contributions may be made either directly by you to your HSA or by payroll deduction. If your contributions are made by payroll deductions then your contributions are taken before taxes are calculated and are not subject to federal income tax, FICA (Social Security and Medicare) tax and for most states, state income tax. If you make deposits directly to your account you may take an above the line deduction when filing your annual tax return. "Above the line" means you reduce your taxable income regardless of whether you itemize or use the standard deduction on your income tax form. You may deduct the contribution amount, subject to the maximum annual contribution limits from your taxes, at filing time.
4. Is tax reporting required for an HSA?
Yes. IRS Form 8889 must be submitted with your tax return each year to report total deposits and withdrawals from your account.
You do not have to itemize to complete this form.
5. Do I need to itemize on my tax return? What does the IRS require me to report on my taxes?
No, you will not need to itemize on your return. However, the IRS requires that you complete and submit the Form 8889 with your tax return. On this form you will report all employer contributions to the account (including your contributions made by payroll deduction). In addition, you will report your qualified distributions. Please contact your tax advisor to discuss your specific situation.
6. Income Tax Filing
When you file your federal income tax return, you have to include your HSA information. You should use IRS Form 8889 to report your HSA contributions (including those made on your behalf, and IU's contributions). It should also be used to report any distributions from your HSA. You will need to file this form with your Form 1040 or Form 1040 NR.
To assist you, you will receive a W-2 statement from the University, a Form 1099-SA and Form 5498-SA from Nyhart. For advice about tax matters consult your personal tax advisor or the IRS help line at 1-800-TAX-1040 (800-829-1040).
7. What is Form 1099-SA?
IRS Form 1099-SA is used to report all withdrawals (distributions) from your HSA to the Internal Revenue Service (IRS). Nyhart files a copy electronically with the IRS and posts a copy to your online account by the end of January of the following year. You can find your tax statements by logging on to Nyhart’s website then selecting Your Balances, Accounts, then Statements.
8. What is Form 5498-SA?
This form is used to report all contributions made to your HSA in a given tax year to IRS. Nyhart files a copy electronically with the IRS and posts a copy to your online account by mid-February of the following year. You can find your tax statements by logging on to Nyhart's website then selecting Your Balances, Accounts, then Statements.
9. My HSA deduction is shown in Box 12 of my W-2 as Code W. Why is it designated as an employer contribution when I have contributed the money to the account?
Consistent with applicable IRS guidelines, HSA deductions reported on your W-2 in Box 12 includes contributions made by the employer and employee contributions made through a section 125 cafeteria plan as a pre-tax salary deferral. When you prepare your taxes at year-end, you are required to complete an additional tax form. Form 8889 and instructions are available at www.irs.gov. You will report the figure in Box 12 on line 9 of Form 8889 (as of 2016).