It's Tax-Preparation Time. What Every Owner Needs to Do Now.

Yes, Health Savings Accounts are triple-tax-free. But you must complete some paperwork to receive the full benefit. Relax - the work isn't taxing.

It's said that the only two certainties in life are death and taxes. (Yes, former NBA guard Otis Birdsong revised the list to include a third entry - 'my jump shot' - but that's generally not recognized as a third certainty.)

The statement isn't literally true, as any educated Health Savings Account owner knows. Funds flowing into and out of this tax-perfect account are never taxed when the distributions are for qualified expenses. But to receive the full tax benefit, owners must limit their withdrawals to qualified products and services and file the appropriate paperwork to receive the full tax benefit.

And that paperwork is part of a personal income tax return, which many taxpayers are - or soon will be - working diligently to complete by the spring deadline.

Here's what you need to know to gain the full tax benefits of your Health Savings Account for 2023.

Summing Contributions

Your Health Savings Account trustee is responsible for issuing Form 5498-SA, which reflects all contributions during the 2023 calendar year (contributions are always tracked on the calendar year, regardless of when your medical plan renews) and the fair market value of the account. Trustees have until May 31 to issue this form because account owners can contribute up to the standard tax-filing deadline (around April 15). Thus, you won't have a final Form 5498-SA to help you prepare your tax return.

So, how do you determine how much you contributed in 2023?

1. Many trustees post a preliminary Form 5498-SA shortly after the end of the plan year on your online account. If you make no contributions after Dec. 31, that document should accurately reflect all deposits.

2. Form W-2, issued by your employer no later than Jan. 31, summarizes payroll activity (total cash compensation, the value of certain other compensation, and itemized payroll deductions). Box 12 has an entry for the sum of all contributions through the company's Cafeteria Plan - both your employer contribution and your pre-tax payroll deductions. If you contribute only through payroll deductions, this figure will accurately reflect your total contributions.

3. Your trustee. You can tabulate contributions by reviewing each line of account activity through your online account. Or you can call and speak to a customer service representative, who should be able to do the calculation for you.

All contributions through your company's Cafeteria Plan are pre-tax at the time you receive each paycheck. Therefore, you can't deduct them from income on your personal tax return. But deposits with personal funds are post-tax and must be deducted on your tax return to reduce your taxable income.

Summing and Qualifying Distributions

You should have received a copy of Form 1099-SA (instructions here) if you withdrew funds from your account in 2023. This form, prepared by your trustee, must be mailed by Jan. 31. It's also typically posted on your online account.

Form 1099-SA reflects total distributions from your account during the calendar year. It doesn't break down those expenses as qualified and non-qualified. The law places the burden of knowing whether each expense is qualified on you, not your Health Savings Account trustee. (Note: In contrast, a Health FSA administrator is responsible for substantiating all expenses because spending is limited to qualified expenses.) You must maintain records to determine the subtotals of qualified and non-qualified withdrawals.

Note that Form 1099-SA may include some distributions that really weren't distributions.

Example: I withdrew my balance from a Health Savings Account with a former employer and deposited it into a new account within 60 days. This process is called a rollover, and owners are permitted to execute one rollover per 12-month period. Because I requested the check be sent to me, my former trustee labeled the transaction a distribution. But because I deposited the funds into another Health Savings Account, the two transactions washed. If my tax return is audited and I'm questioned about not reporting this distribution as shown on my Form 1099-SA, I can show an identical amount deposited into a new health Savings Account within 60 days.

It may also include mistaken distributions, unless you returned the funds and indicated (usually via a paper form) that the deposit is a return of a mistaken distribution and not a contribution. If you need to fix a problem, be sure to contact your trustee immediately.

Tax Preparation: Form 8889

Once you gather the relevant contribution and distribution numbers, you must complete Form 8889 and include it with your tax return. You must file Form 8889 if you contributed to, distributed from, or received (due to the death of the owner) a Health Savings Account in 2023. That requirement captures nearly every account owner.

The form is easy to follow:

Part I - Contributions: You'll include any contributions outside a Cafeteria Plan on Line 3 to receive the tax deduction. For most taxpayers, the rest of the section merely checks to ensure that contributions are within the statutory limits.

Part II - Distributions: Here, you list total distributions on Line 14 and qualified distributions on Line 15. The difference, on Line 16, represents distributions for non-qualified expenses. This amount is included in your taxable income. In addition, it's subject to a 20% additional tax unless you're either (1) disabled or (2) age 65 or older.

Part III - Income and Additional Tax: This section calculates the additional tax amount and penalty.

What Can You Do Now to Affect 2023 Taxes?

You can still reduce your taxable income for 2023 by making additional deposits up to your statutory maximum contribution limits of $3,850 for self-only and $7,750 for family coverage, plus an additional $1,000 catch-up contribution if you're age 55 or older. You can contribute through April 15, 2024, even if you file your tax return before that date. [Note: Taxpayers in some regions may have later filing deadlines due to storms and other natural disasters. The Internal Revenue Service has already extended the tax-filing deadline - and thus the deadline to deposit 2023 Health Savings Account contributions - to June 17 for certain taxpayers living in Connecticut and affected by severe January weather.]

But note that you can't make additional contributions for 2023 through your company's Cafeteria Plan. All 2023 contributions deposited in 2024 must be personal funds, which you can deduct on Form 8889.

You can correct mistaken distributions before filing our personal income tax return as well. By doing so, you'll avoid potential taxes and penalties.

The Bottom Line

This tax reporting obligation may seem daunting to a new Health Savings Account owner. Relax. It's not overly burdensome if you have maintained proper records. If you use tax software, it will ask you whether you have a Health Savings Account, then ask you the right questions to fill in Form 8889 properly. Your personal tax preparer should know how to report Health Savings Account activity as well.

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HSA Wednesday Wisdom is published fortnightly, alternating with HSA Question of the Week on Wednesdays. The content of this column is informational only. It is not intended, nor should the reader construe the content, as legal advice. Please consult your personal legal, tax, or financial counsel for information about how this information applies to you or your entity. HSA Wednesday Wisdom is published every other Wednesday, alternating with HSA Question of the Week.