Desktop: Form 8889, Health Savings Account (HSA)

A health savings account (HSA) is an account set up with a qualified HSA trustee that is used to reimburse qualified medical expenses incurred by an individual, their spouse, and their dependents. HSA accounts are used by eligible individuals that have medical coverage under a high deductible health plan (HDHP), and distributions from the plan to pay for qualified medical expenses are excludible from gross income.

Form 8889 is used to report the contributions to and distributions from the HSA for the purpose of determining the HSA deduction and if any distributions are taxable.

An eligible individual is:

• covered under a HDHP and has no other insurance coverage, with the exception of telehealth and other remote care coverage;
• is not enrolled in Medicare;
• is not a dependent on someone else's tax return.

See the Form 8889 instructions for the kinds of products and services that qualify. Note that a qualified medical expense paid for by an HSA cannot also be included as an itemized deduction on Schedule A (Form 1040). Qualified medical expenses do not include expenses incurred prior to when the HSA was established, nor expenses paid for by insurance or other coverage.

An individual who received distributions from an HSA must file an income tax return, even if they had no taxable income or had no other reason to file a return.

The Form 8889 has three distinct sections:

Part I – HSA Contributions & Deductions - This section of Form 8889 is used to report contributions that were made to an HSA by the taxpayer, their employer, or a trustee-to-trustee funding distribution from a traditional or Roth IRA. Employer contributions are reported on the taxpayer’s W-2 in Box 12 with code W. The taxpayer's contributions are reported on Form 5498-SA (but generally not until after the original filing deadline of their individual tax return.) Contributions are deductible up to annual contribution limitations.

Part II – HSA Distributions - The distributions menu is used to report any distributions made from an HSA. These distributions will be reported to the account owner on Form 1099-SA. Distributions can be made either to the taxpayer or a designee and are to be used to cover medical expenses or to reduce the amount in an HSA account due to excessive contributions. Distributions used to pay for qualified medical expenses are not taxable, however distributions used for ANY other purpose are taxable and may be subject to an additional 10% penalty.

Part III – Failure to Maintain HDHP Coverage - Use Part III to figure any income and additional tax that must be reported on Form 1040 or Form 1040-NR for failure to be an eligible individual during the period.

Form 1099-SA Distribution Codes

The distribution code in Form 1099-SA Box 3 indicates the kind of distribution made and its tax ramifications. Depending on the code, the taxpayer may also be subject to an additional taxes.

HSA Contribution Limits

HSA contributions can be made for a given tax year, up to the original due date of the tax return for that year. The annual contribution limits are subject to an annual adjustment. Recent year limits are as follows:

Entering contributions to an HSA

To enter contributions to a HSA in TaxSlayer Pro, from the Main Menu of the tax return (Form 1040) select:

• Adjustments
• Health Savings Account Deduction (8889) - If MFJ, select Taxpayer or Spouse.
• If queried, indicate whether coverage is for just the taxpayer or if it covers the family as well.
• Part I – HSA Contributions & Deductions
• Contributions Under High Deductible Health Plan - Shows Self or Family coverage as previously indicated.
• HSA Contributions you made for 20xx - Enter the contributions made during the tax year. This includes contributions for the tax year made in the following year but before the filing deadline, but doesn't include employer contributions made through a cafeteria plan (shown on Form W-2 Box 12 with code W) nor a contribution via a funding distribution from an IRA. This amount is typically found in Form 5498-SA Box 1, though that form may not be up to date with contributions made before the filing deadline.
• Number of Months Eligible to Deduct HSA Contributions - Enter the number of months that the individual was covered under the HDHP. A person is considered covered for a month if they had the coverage on the first day of the month.
• Limitation from Worksheet - This amount will defaulted to the maximum amount of contributions allowed for the coverage type selected but can be adjusted if necessary.
• Employer Contributions Made to Your MSA(s) for 20xx - If the taxpayer also has a Medical Savings Account (MSA) that their employer contributed to, enter the amount contributed here. If the taxpayer and spouse both had HSAs and had family coverage under an HDHP at any time during the year, include any amount contributed to the spouse's MSA.
• Your Share of High Deductible Health Plan - This amount is calculated based on lines 3-5 and can be adjusted if necessary.
• Additional Amount from Family Coverage High Deductible Plan - This amount is automatically calculated if the taxpayer is over the age of 55, married, was enrolled in a HDHP, and was not enrolled in Medicare at all during the year. This amount can be adjusted if necessary.
• Employer Contributions made to your HSA(s) for 20xx - This amount corresponds to the amount entered in the individual's W-2 in Box 12 with code W.
• Qualified HSA Funding Distributions - Enter the amount of contributions to the HSA made via direct transfers from either a traditional or Roth IRA.
• HSA Deduction - The calculated deduction carries to Schedule 1 as an adjustment to income.

Entering distributions from an HSA

To enter distributions from an HSA in TaxSlayer Pro, from the Main Menu of the tax return (Form 1040) select:

• Adjustments
• Health Savings Account Deduction (8889) - If MFJ, select Taxpayer or Spouse.
• If queried, indicate whether coverage is for just the taxpayer or if it covers the family as well.
• Part II – HSA Distributions
  • Total HSA Distributions received during 20xx - Enter the amount of distributions indicated on the individual’s Form 1099-SA in Box 1. If there are multiple Forms 1099-SA, enter the sum of the Box 1 amounts. Additionally, if the distribution code on Form 1099-SA is 5 for a prohibited transaction, enter here the fair market value of the HSA as of January 1 of the tax year.
  • Distributions included above that you Rolled Over - Enter the amount of distributions received that was rolled over into another HSA account, if any.
  • Subtract Line 2 from Line 1 - This amount represents the amount of distributions used by the individual.
  • Qualified Medical Expenses paid using HSA Distributions - Enter the total of the qualified medical expenses that were paid for with HSA distributions.
  • Taxable HSA Distributions - The taxable amount, if any, is the excess of distributions over actual expenses.
  • Do you meet any of the Exceptions to the 20% Tax? - HSA distributions not used for qualified medical expenses are subject to an additional 20% tax, however there are several exceptions:
  • The beneficiary has died, or
  • The beneficiary has become disabled, or
  • The beneficiary has reached age 65.

  If the taxpayer meets one of the exceptions, select this line, answer Yes to the exception question, and enter the amount that qualifies.

  • HSA Distribution Tax - If the taxpayer has excess distributions and doesn't meet any of the exceptions, 20% additional tax will calculate and carry to Schedule 2.

  Failure to Maintain HDHP Coverage

  Part-Year Coverage - The "last-month rule" states that if the taxpayer was eligible for HSA coverage on the first day of the last month of the prior tax year (generally that's December 1) they could contribute to the HSA up to the maximum amount for the full year. If they didn't maintain HDHP coverage for all of the current tax year, except for death or disability, they will need to include in income the HSA contributions they made that they otherwise would not have made but for the last-month rule. You will use the Line 3 Limitation Chart and Worksheet in the Form 8889 instructions to calculate how much to enter on this line. See IRS Publication 969 for additional information and examples.

  Qualified HSA Funding Distribution - Similar to above, if the taxpayer's HSA received a funding distribution from their traditional or Roth IRA, they must maintain coverage for one year starting from the month of the distribution and ending in the same month one year later. If they failed to maintain HDHP coverage during that time period, except for death or disability, they will need to include the entire amount of the funding distribution in income in the year in which they ceased to be an eligible individual. Enter that amount on this line.

  Note: This is a guide on entering Form 8889 into the TaxSlayer Pro program. This is not intended as tax advice.

  Additional Information:

  IRS: Instructions for Form 8889

  IRS: Instructions for Forms 1099-SA and 5498-SA