HSA Tax Filing Guide for the 2021 Tax Season

It is important to know the basics of how HSAs work to file taxes correctly. In this section, we’ll break down what constitutes a contribution, contribution limits, qualified withdrawals, and tax responsibility.

At the start of each plan year, check the latest IRS contribution limit for HSAs, so you don’t exceed this amount. For 2020, the maximum amount you could contribute to an HSA was $3,550 for an individual plan and $7,100 for a family plan. If you were over age 55 in 2020, you could have added another $1,000 to those limits as part of the “catch-up” contribution program for those nearing retirement. This total contribution limit includes any contributions you made either through payroll or out-of-pocket, contributions your employer made, or any contributions made by others.

HSA contribution limits apply to the total of all contributions from every source contributing to every HSA you own. For instance, if you have two HSA accounts, and your employer contributes to one, and you alone contribute to the other, the total amount contributed to both accounts can’t exceed the IRS maximum for the year. You can continue to contribute to the HSA up to the tax filing deadline for that tax season, which means that for the 2021 tax year, you can continue making contributions up to May 17.

If you had a high-deductible health plan (HDHP) for only part of the year, your contribution limit may be prorated based on the number of months you’re covered by an HDHP. For example, if you’re enrolled in an HDHP for the first 6 months of the year, then leave the HDHP on June 30, you’re allowed to contribute half of the annual maximum contribution because you were enrolled for half the year.

An exception to the prorated limit applies, which allows you the full year’s deduction if you’re enrolled in the HDHP as of the first day of the last month of your tax year (typically December 1) and maintain eligibility for 12 months after the end of the last month of your tax year (typically December 31 of the following year). In this case, you can contribute the full yearly contribution limit for a partial enrollment without it being considered an excess contribution.

If you exceed your contribution limit for the year, you must either correct the over contribution or report excess contributions. The HSA owner must report the amount contributed to the HSA over the limit as “Other Income” and pay a 6% excise tax on it. The HSA owner may also have to pay income tax on the amount, if it was not already included in gross income by their employer. For more details, see IRS Publication 969 in the section on HSA “Excess Contributions.”

Money withdrawn from an HSA is called a distribution, and while you don’t pay taxes for eligible medical spending (see exceptions in the “HSA Tax Responsibility” section below), you do need to report distributions on your tax return on Form 8889. As long as you only used HSA funds for eligible medical expenses, you don’t pay taxes on money you withdrew from the HSA. However, if you used HSA funds for something other than a medical expense, you do owe income tax plus you may owe an additional 20% penalty on money you withdrew for non-medical purposes.

In the event of audit, you may be required to prove your distributions were for qualified medical expenses to the IRS. It is good practice to keep receipts of purchases made using HSA funds or reimbursements you received for your tax records. However, you do not have to send receipts to the IRS when filing your return!

In most states you do not have to pay taxes on the funds you contributed through payroll or withdrew from the HSA to pay for eligible medical expenses. However, the tax responsibility for HSAs does vary by state. Be sure to check your local state tax laws or check with your tax advisor to file correctly.

Any earnings you gain in your HSA are exempt from taxes so long as they remain in the account. So if you have funds leftover in your HSA at the end of the tax year, those do not count as earned income on your tax return since they are still being held in the HSA. Check your state and local laws about this rule as it varies by state.

If you have an Individual HSA or have an HSA through your employer and contributed post-tax funds to your account, you can claim tax deductions on those funds. Out-of-pocket HSA contributions are tax-deductible and can be claimed through IRS Form 8889 and Form 1040. To learn more about Individual HSAs, check out our blog article for details.

When you are filing taxes with an HSA, there are some IRS forms you should know about to file HSA contributions and distributions correctly.

Here is a list of HSA-related tax forms you may need and a brief explanation of each.

By February 1st, if you work for an employer, you should have received your W-2 form stating your total income for the year and taxes withheld. If you have an HSA, you should check Box 12-W on the form to see what pre-tax HSA contributions were made to your account by you and your employer. This contribution total may be used to complete Form 8889 (we’ll get to that one). Only contributions made by you or your employer through payroll will appear on your W-2. Note – You will not receive reporting on your post-tax contributions until after the tax filing deadline. Please check with your custodian to determine the annual contributions you made for 2020, including any contributions made for 2020 between January 1, 2021 and April 15, 2021.

By February 1st, you should have also received Form 1099-SA from your HSA custodian stating total distributions (money you withdrew) from your HSA for the year. This includes any HSA funds you spent on medical expenses with a payment card and money withdrawn through online reimbursement requests. If you did not use any HSA funds, you will not receive Form 1099-SA. It is possible that you may only receive this form electronically. If you are a CYC account holder, you can access it online by logging into your account and selecting the tax option in your dropdown menu.

HSA participants need to use the 1040 long form to file taxes not the 1040 EZ form. Refer to the IRS Instructions for Form 1040 or contact your tax advisor for details on how to complete it.

Form 8889 reports all HSA contributions and distributions for the tax year. This form also allows you to report if any of your HSA funds were used for non-qualified medical expenses. Refer to the IRS Instructions for Form 8889 or contact your tax advisor for details on how to complete it.

If applicable, you need to submit this form, along with Form 1040, to report excess HSA contributions that are not withdrawn from your HSA prior to the tax filing deadline. Consult your tax advisor if you have questions about this form or excess contributions.

*As of the date of publication, the IRS has not published all the tax forms for 2020. We will update this post and any changes to forms as necessary once the remaining 2020 tax forms go live.

By May 31, you should receive a Form 5498-SA from your HSA custodian, reporting the total contributions made to your HSA for the 2020 tax year. This form is usually created after the tax filing deadline (typically April 15th) to include any contributions made to your HSA up to the tax filing deadline. This form is also submitted by your HSA custodian to the IRS. You do not need Form 5498-SA to file your income tax return, but you should confirm the contribution amount and keep this form for your records. Like form 1099-SA, this form could be mailed or provided electronically to you. You may also receive an updated Form 5498-SA if you make previous tax year contributions in the current tax year.