Form 1099-SA is the form your employees will receive annually from the provider administering their Health Savings Account (HSA), Medicare Advantage Medical Savings Account (MA MSA), or Archer Medical Savings Account (Archer MSA). It reports any distributions (also called withdrawals) made from the account throughout the financial year.
If you offer your employees an HSA as a benefit, you should let them know that they’ll need Form 1099-SA when filing their federal taxes, in order to declare how much money they’ve spent from their health account. If the information held by the IRS and the information given by the employee does not line up, the IRS may launch an audit against your company or ask for more money from your employee, which could be a stressful process for both parties.
Therefore, while you do not need Form 1099-SA for your own tax purposes, it is important to support your employees in filing their taxes in compliance with the IRS. Read on to understand how to guide your employees in using Form 1099-SA.
Which Distributions Are Tax-Free?
Distributions are generally tax-free if the employee uses them to pay for any qualified medical expenses incurred by themselves, their spouse, or any dependents registered on their claim form. Note that if your employee claims they have dependents, they cannot be claimed as a dependent on anyone else’s form. Your employee should also be aware that an MA MSA is only tax-free where it is used to pay for the qualified medical expenses of the account holder, not their spouse or dependents.
Qualified medical expenses include those generally eligible for medical, vision, and dental expenses deductions, ranging from routine doctor’s office visits to diagnostics, treatments, and surgeries. The IRS publishes a complete list of qualifying expenses on its website.
The distribution is also tax-free if the employee rolls it over to the next financial year. It’s possible to roll an HSA over into another HSA the following financial year or to roll an Archer MSA over to a different Archer MSA or HSA account. Your employee must do this manually by filling in either IRS Form 8853 or IRS Form 8889.
Any interest an employee earns on their HSA savings is tax-free, and any contributions an employee or employer makes to the HSA are considered pre-tax, up to a maximum annual limit. However, some states may impose their own tax guidelines. In New Jersey and California, for example, HSA contributions and earnings are subject to state income tax, so if you’re working in those states, it’s important to keep that in mind.
Which Distributions Are Taxable?
HSA contributions are tax deductible up to the annual contribution limit, which varies depending on your employee’s circumstances. For the 2022/23 tax year the limit is $3,650 for individuals and $7,300 for families. Those aged 55 and over are eligible for a catch-up limit that enables them to contribute an extra $1,000 per year to their HSA account.
You should encourage your employees to plan their HSA contributions strategically so they don’t exceed their annual contribution limits. Taxes will apply if they accidentally make an over-contribution to their HSA or Archer MSA. For example, suppose the employee withdraws their over-contribution and any interest it has accrued before their income tax return due date. In that case, they must include that withdrawal in their annual income even if they used it for qualified medical expenses. In addition, the employee must pay a 6% excise tax each year that excess employee and employer contributions remain in the account.
If the distributions listed on their Form 1099-SA were not used for qualified medical expenses, the employee will be taxed at a rate of 20% and may also be charged a penalty. The employee’s Form 1099-SA will notify them of any ineligible expenses: box 3 of their form will indicate a No.5 contribution (also called a code 5). To avoid being taxed or even fined on this deduction, the employee should add this amount deducted back to their gross income.
How To Use Form 1099-SA
If an employee asks, “What do I do with my 1099-SA?” you should first ensure that they also have Form 8889. This form, which is submitted with the tax return (Form 1040), is used to report all HSA contributions and distributions during the tax year. It must include the information found on Form 1099-SA.
Form 1099-SA shows the total amount your employee has withdrawn from their HSA account throughout the tax year. It is broken down into five key areas of withdrawal: normal, excess contribution removal, death, disability, and prohibited transaction. If the employee is filing their taxes using software or via the IRS website, they can import the data directly from their Form 1099-SA to their Form 1040.
It’s worth keeping your employees aware of both the HSA contribution deadline and the deadline for filing their federal taxes. The dates shift slightly every year, which can be confusing. However, for 2022, the deadline for HSA contributions was April 15, and the deadline for filing federal taxes was April 18. Be sure to keep up to date with the deadlines for 2023 to take the pressure off your employees.
Form 1099-SA is an important form that your employees must be aware of when filing their taxes. The form lists any deductions an employee, their spouse, or their dependents have made during the financial year and highlights any ineligible expenses so the employee can add them back to their income. Overall, it is an informative document that assists them in filing their taxes.
While it’s not your responsibility to ensure your employees file their taxes correctly, it can help strengthen the relationship between you and your team. It may also reduce your team’s stress levels if they have your support. A less stressed team means a more productive team, which will encourage morale and boost productivity.
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