IRS Form 1099-SA: Distribution Codes, Penalties, and Reporting

IRS Form 1099-SA is the information return your account custodian issues each January showing every distribution you took from a Health Savings Account, Archer Medical Savings Account, or Medicare Advantage MSA during the prior calendar year.¹ One copy goes to you, one goes to the IRS. The form reports what came out of the account. It does not decide whether the money is taxable. That depends on how you spent it, the code the custodian put in Box 3, and how you report the distribution on Form 8889 or Form 8853.

Reading the Boxes on Your Form

Each box captures a specific piece of the picture. Understanding them in order makes the rest of the filing process straightforward.

Box 1 — Gross distribution. The total of all withdrawals during the year, including principal and any investment earnings paid out with them.² This is a raw number. It says nothing about whether the money paid for a knee surgery or a weekend away.

Box 2 — Earnings on excess contributions. If you overcontributed and pulled the excess back out before your filing deadline, Box 2 shows the earnings on those excess dollars. Those earnings are taxable income for the year of the contribution.³

Box 3 — Distribution code. A single digit that tells the IRS why the money left. It is the most important entry on the form.

Box 4 — Fair market value on the date of death. Used only when the account holder has died. If the distribution occurs after the year of death, the custodian reduces the FMV by any payments already made from the account for the decedent’s qualified medical expenses within one year after death.²

Box 5 — Account type. A checkbox identifying the account as an HSA, Archer MSA, or Medicare Advantage MSA. HSAs are reported on Form 8889. Archer and Medicare Advantage MSAs are reported on Form 8853.

The Six Distribution Codes in Box 3

Code 1 — Normal distribution. The default. It covers ordinary withdrawals to pay providers or reimburse yourself. If no other code fits, custodians use this one.²
Code 2 — Excess contributions. The withdrawn excess avoids the ongoing 6% excise tax, but the earnings in Box 2 are still taxable.²
Code 3 — Disability. Distributions taken after the account holder becomes disabled under the tax code’s definition (unable to engage in any substantial gainful activity due to a physical or mental condition expected to result in death or last indefinitely). This code removes the 20% additional tax on non-medical spending.⁴
Code 4 — Death distribution. Used for payments to the deceased account holder’s estate or to any beneficiary in the year of death. Box 4 will also be filled in.⁴
Code 5 — Prohibited transaction. Signals that the account was used in a transaction the code forbids, such as pledging HSA funds as collateral. The account can lose its tax-exempt status, and its full value may become a taxable distribution. If you see Code 5, talk to a tax professional before filing.⁵
Code 6 — Death distribution to a non-spouse beneficiary after the year of death. Used only in years after the account holder died, and never alongside Code 4.⁴

Qualified Medical Expenses Decide the Tax

The dollar figure in Box 1 does not determine your tax bill. What matters is how much of it went to qualified medical expenses. The IRS defines those as costs for diagnosis, treatment, and prevention of disease, and for expenses affecting any structure or function of the body. Prescription drugs qualify. Cosmetic procedures and general wellness supplements generally do not.⁶

Your custodian has no way of knowing whether a $3,200 withdrawal paid a surgeon or a furniture store. You make that determination when you fill out Form 8889 or Form 8853, and you carry the burden of proof if the IRS asks. Anything above your qualified expenses gets added to gross income and hit with an additional 20% tax.³⁷

When the 20% Penalty Does Not Apply

Three circumstances remove the additional 20% tax on non-qualified spending, though the money is still ordinary taxable income:

Age 65 or older. Non-medical withdrawals are taxed as ordinary income but carry no penalty.³
Disability. Your form should carry Code 3.⁴
Death. The tax treatment for the beneficiary depends on whether the beneficiary is a spouse.³

A common misunderstanding: “no penalty” is not the same as “no tax.” After 65, a $5,000 withdrawal you spend on a trip is still taxable income. You just don’t owe the extra 20%.

Reporting the Distribution on Your Return

If you took any HSA distribution during the year, you must file Form 8889 with your federal return, even if every dollar went to qualified medical care and you owe nothing extra.⁸ Skipping the form when the IRS already has your 1099-SA is one of the fastest ways to draw a notice.

Take the amount in Box 1 and enter it on Form 8889, Line 14a. On Line 15, enter only the portion spent on qualified medical expenses. The difference flows to your taxable income, and Form 8889 calculates the 20% additional tax if it applies. Those amounts then move to Schedule 1 and Schedule 2 of your Form 1040.⁸

Archer MSA and Medicare Advantage MSA holders use Form 8853 instead. The Box 1 total goes on Line 6a, and the calculation to separate qualified from non-qualified spending works the same way.⁹

Tax software usually handles the placement automatically once you enter the 1099-SA data exactly as it appears. Confirm that the numbers land on the correct lines. Mismatches between what the IRS has from your custodian and what shows up on your return are a routine audit trigger.

Excess Contributions and Mistaken Distributions

If you contributed more than the annual limit, you can avoid the 6% excise tax by withdrawing the excess plus its earnings before the due date of your return, including extensions.³ The custodian issues a 1099-SA with Code 2 and reports the earnings in Box 2. Miss the deadline and the excess keeps accruing the 6% tax every year it stays in the account.

Money sometimes leaves an HSA by accident. A debit card charged to the wrong account, a payment for something you later learn wasn’t qualified. The IRS lets you repay a mistaken distribution back into the HSA if the mistake was due to reasonable cause, provided you do so by April 15 of the year after you first knew or should have known.¹⁰ A repayment within that window keeps the distribution out of taxable income.

If the Form Is Wrong or Never Arrives

If the numbers on your 1099-SA don’t match your records, contact your custodian and request a corrected form. Custodians are required to file a corrected 1099-SA with the IRS and send you a copy once they know of an error.² Don’t file with figures you know are wrong just to meet a deadline; you may need to amend the return once the corrected form arrives.

If the form hasn’t shown up by mid-February, check the custodian’s online portal, since many deliver electronically. If it still isn’t there, call. You are responsible for reporting the distributions whether the form reaches you or not, so keep your own withdrawal records as a backup.

Transfers That Do Not Generate a 1099-SA

A direct trustee-to-trustee transfer of your HSA to another financial institution produces no 1099-SA. The IRS explicitly excludes those transfers from reporting on this form. The same applies to transfers between Archer MSAs and from an Archer MSA to an HSA.⁴

A rollover is different. In a rollover the money comes to you first, and you must redeposit it into another HSA within 60 days. Rollovers are limited to once every 12 months and will appear on a 1099-SA because the custodian records the payout as a distribution. When you have a choice, the direct transfer avoids reporting entirely.

Records You Need to Keep

You are required to keep records showing that your distributions paid only for qualified medical expenses, that those expenses were not reimbursed from another source, and that you did not also claim them as itemized deductions.³ Receipts, explanation-of-benefits statements, and provider invoices, organized by year, are the minimum. You don’t send them with your return; you need them if the IRS asks.

The general rule is three years from the date you filed. If you understate income by more than 25%, the IRS has six years. If you never file or file a fraudulent return, there is no time limit.¹¹ For HSA distributions, a workable practice is to keep everything for at least three years after you file the return that reported them, and longer if a large share of your withdrawals could be challenged as non-qualified.

1
Internal Revenue Service. Publication 1099, General Instructions for Certain Information Returns
2
Internal Revenue Service. Instructions for Forms 1099-SA and 5498-SA
3
Internal Revenue Service. Publication 969 – Health Savings Accounts and Other Tax-Favored Health Plans
4
Internal Revenue Service. Instructions for Forms 1099-SA and 5498-SA
5
Office of the Law Revision Counsel. 26 USC 223 – Health Savings Accounts
6
Internal Revenue Service. Frequently Asked Questions About Medical Expenses Related to Nutrition, Wellness and General Health
7
Office of the Law Revision Counsel. 26 USC 220 – Archer MSAs
8
Internal Revenue Service. Instructions for Form 8889
9
Internal Revenue Service. Instructions for Form 8853
10
Internal Revenue Service. Distributions for Qualified Medical Expenses
11
Internal Revenue Service. How Long Should I Keep Records?