A health savings account (HSA) is a tax-exempt account set up with a qualified HSA trustee that can be used to reimburse certain medical expenses incurred by an individual, spouse, or qualified dependents. These HSA accounts are used by taxpayers that have medical coverage under a high deductible health plan to contribute to the plan and then pay medical expenses with Any medical expenses reimbursed by an HSA cannot be covered or reimbursable by insurance or any other sources.
The contributions to and distributions from a Health Savings Account are reported on the tax return on Form 8889. The Form 8889 has three distinct sections, each of which are described below.
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 from distributions from a Traditional or Roth IRA. These contributions are normally reported on Form 5498-SA (for taxpayer contributions) or on the Taxpayer’s W-2, Box 12 (for employer contributions). Contributions are deductible, but are based on 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 1040NR for failure to be an eligible individual during the period.
Distribution Codes
On the Form 1099-SA, Box 3 are the distribution codes which determines the tax ramifications of the distribution. Depending on the code, the Taxpayer may also be subject to an additional taxes.
| 1 | Normal distribution. |
| 2 | Excess Contributions: This code denotes that the Taxpayer, employer, or others on the Taxpayer’s behalf have made more than the allowed contributions for the year and they made the distribution of the excess amount. This amount may be subject to additional taxes. |
| 3 | Disability: This code shows the taxpayer became disabled and is not subject to the additional tax on a distribution. |
| 4 | Death distribution other than code 6: This distribution was made due to the passing of the taxpayer and is not subject to additional tax. |
| 5 | Prohibited Transaction |
| 6 | Death distribution after year of death to a non-spouse beneficiary. |
Health Savings Accounts 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 amounts of the annual contributions are adjusted each year. Set forth below are the current amounts.
| 2019 | 2018 | |
| Contribution Limit (Single) | $3,500 | $3,450 |
| Contribution Limit (Family) | $7,000 | $6,850 |
| Additional Catch-Up Contribution | $1,000 | $1,000 |
To enter Contributions to a Health Savings Account in the tax program, from the Main Menu of the Tax Return (Form 1040) select:
- Adjustments
- Health Savings Account Deduction (8889) – Select Taxpayer or Spouse
- Choose whether coverage is for just the Taxpayer, or if it covers the family as well
- Choose Part I – HSA Contributions & Deductions
- Line 1 – Shows the coverage you have selected. If this option is not correct, you can click this line to make changes.
- Line 2 – Enter the contributions made for the tax year. This amount would typically be found in Box 1, Form 5498-SA
- Line 3 – Enter the number of months that the covered person (taxpayer or spouse) was covered by the high deductible health plan. A person is considered covered for the month is they had the coverage on the first day of the month.
- Line 4 – This amount will defaulted to the maximum amount of contributions allowed for the coverage type selected. This can be adjusted in the tax program if necessary.
- Line 5 – Used if the Taxpayer also has an Medical Savings Account that their employer made contributions to. The most common option is to leave this at $0.
- Line 6 – Automatically calculated based on the amounts entered on lines 3-5.
- Line 7 – Automatically calculated if the taxpayer is over the age of 55, married, and was enrolled in a High-Deductible Health Plan (HDHP), and not enrolled in Medicare at all during the year.
- Line 8 – Populated based on the information entered on the taxpayer’s W2. If Box 12, has a code W, whatever dollar amount you entered on the W-2 Entry Menu will be carried to this line.
- Line 9 – Used if contributions to the HSA were made with deductions from either a Traditional or Roth IRA. This must be a direct transfer, meaning the money went straight from the IRA to the HSA.
- Line 10 – Automatically calculated and will carry to Form 1040, line 25.
To enter a Distributions from a Health Savings Account in the tax program, from the Main Menu of the Tax Return (Form 1040) select:
- Adjustments
- Health Savings Account Deduction (8889) – Select Taxpayer or Spouse
- Choose whether coverage is for just the Taxpayer, or if it covers the family as well
- Part II – HSA Distributions
- Line 1 – The amount of distributions listed on the taxpayer’s 1099-SA, Box 1.
- Line 2 – Used only if the amount in Line 1 includes amounts rolled over into another HSA account.
- Line 3 – Automatically calculated based on Line 1 and 2.
- Line 4 – The amount of the distribution that was used for qualified medical expenses. Expenses cannot be considered ‘qualified’ if they were covered by any type of medical insurance or any other type of coverage.
- Line 5 – The taxable amount of HSA distributions for the Taxpayer.
- Line 6 – Designates whether or not the taxpayer is subject to an additional tax for withdrawing funds from an HSA. Generally, if the funds were not used for qualified medical expenses, the taxpayer will have to pay the additional tax; however, the following exceptions may apply and you would change the answer to YES:
- The beneficiary has died, or
- The beneficiary has become disabled, or
- The beneficiary has reached age 65.
- Line 7 – The amount of the HSA distribution that is taxable and will be carried to Form 1040, Line 62 with box C checked and marked HSA and the taxable amount.
NOTE: This is a guide on entering Form 8889 into the Keystone Tax Solutions Pro program. This is not intended as tax advice.
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