If you’re young, healthy, and not hoping to give birth anytime soon, one of the best ways to save money is to go on a high-deductible health insurance plan with a Health Savings Account (HSA).
Many large employers offer high-deductible health insurance coverage as the employer-sponsored plan with the lowest monthly premium (that’s your monthly cost), and pretty much all marketplaces offer HSA eligible health insurance plans. If you run into medical trouble, you might pay more, but on a month-to-month basis, you’ll pay less.
And if your plan is “HSA-eligible,” you’re likely to get a few bonus opportunities for saving. Often your employer will contribute a certain amount to your HSA (usually somewhere between $500 and $1,000). On top of that, you can save and invest money within the HSA (up to $3,450 for an individual or $6,900 for a family). That’s money that you save without paying income taxes or Social Security taxes or taxes on the growth (provided that you use the money only for medical expenses).
The HSA can be an excellent savings and investment account for the young professional. However, the HSA requires you to fill out one extra form at tax time. This form explains how to use IRS Form 8889 for HSA contributions, distributions, and deductions.
What Is Form 8889?
Form 8889 is the IRS form that helps you to do the following:
- Report contributions to a Health Savings Account (HSA).
- Calculate your tax deduction from making HSA contributions.
- Report distributions you took from the HSA (hopefully for eligible medical expenses).
- Calculate taxes you owe on the distributions (if you used the money for something not medical related).
Since using an HSA correctly can lead to significant tax savings, it’s important to fill out the Form 8889 each year you use the HSA.
Keep an Eye Out for HSA Tax Documents
Filling out the Form 8889 can be a little confusing, because the information you need can come from several sources. Below are a few places to look for the information.
Employer Contributions and Contributions from Your Paycheck
To learn how much your employer contributed on your behalf, and how much you contributed, you will look at your W-2 form (in box 12 with the code W).
From my personal experience, this can be a little bit confusing. Code W seems to correspond to “employer contributions to HSAs,” but it really means employer and employee contributions to the plan.
Additional Contributions
If you’re either self-employed or you made contributions outside of payroll deductions, then you’ll need to account for those HSA contributions separately. You can almost always find information about these from an annual statement from the company that houses your HSAs.
Personally, I always head to my HSA website at tax time to download any tax documents that are available.
Information About Distributions
Unlike many tax-advantaged investment accounts, you may use your HSA long before retirement. If you break an arm, have a baby, or have some other medical need, you may decide to take a distribution from your HSA.
You may take a distribution from your HSA at any time, without incurring a tax penalty, so long as the distribution is used to pay for qualified medical expenses. However, you must file Form 8889 the year you take a distribution from the HSA.
Save Your Receipts for Medical Expenses
Different people approach HSA accounts differently. One camp uses the HSA almost entirely to pay for current or past medical needs.
One family I know experienced a large volume of medical needs over the course of a few years. This family now owes over $20,000 in medical bills, and all the bills are on a payment plan. Each month, one spouse contributes money to an HSA, pays the monthly payment on the medical debt, and reimburses herself for that payment. She gets the tax advantages of the HSA while paying off debt.
The other camp tries to keep as much money as possible in the HSA to let it grow through investments (we call it the HSA secret IRA). This can lead to massive account balances, and could reduce your need for long-term care insurance later in life. However, this camp may end up drawing from the HSA if they experience a cash flow crunch down the road.
Whether you’re in the first camp or the second camp, you need to save your medical receipts. The first group will use the medical receipts during tax season to prove they used the funds for qualified medical expenses. The second group needs to hang onto the receipts even longer, until they actually take a distribution from the HSA. Years or even decades from now, those receipts could keep you from paying extra taxes on HSA distributions.
Fill Out Form 8889 for Your Taxes
Come tax time, anyone who contributed to or received a distribution from an HSA will need to fill out Form 8889. Of course, most people don’t actually use Form 8889. Instead, you’ll probably use a tax software program like H&R Block or TurboTax. The software will fill out the form for you.
Note: If you use tax software, many programs require an upsell to the "Deluxe" or "Premium" versions to handle the HSA Form 8889. Check your tax software pricing if you have an HSA.
But even if you use software, it’s important to understand the form.
Form 8889 Contributions and Deductions
The first part of the form (line 1 through 13) has to do with HSA contributions. Since you get a tax deduction for eligible HSA contributions, this is important to do correctly. The IRS has robust instructions for filling out the form, so I’ll just go over a few common mistakes.
In line 2 of Form 8889, it says to enter the amount you contributed to an HSA. This only includes contributions you made outside of payroll deductions. Contributions through payroll deductions show up on line 9 — employer contributions to HSAs.
The other confusing part of this section has to do with line 3 — your contribution limit for the year. If you’re on a high-deductible health plan for the whole year, your contribution limit is $3,500 for individual coverage ($4,500 if you’re over age 55) or $7,000 for family coverage ($8,000 for age 55 or over).
These limits also apply if you’re on a high-deductible health plan on December 1st of the tax year.
But what if you change insurance part of the way through the year? Then the limit on line 3 changes. Basically, each month you have high-deductible health insurance, you can contribute 1/12 of the overall limit. So if you have high-deductible health insurance for six months, your limit is $1,750 for an individual.
Once you enter all the information into Form 8889, you’ll see your deduction in line 13. Use this amount to pay less money in taxes.
Form 8889 Distributions
In addition to accounting for contributions, Form 8889 helps you keep track of your HSA distributions. Line 14a shows your total distributions from an HSA. This is the amount of money you take out from an HSA in a given year. For example, if you have cancer and need to withdraw $12,000 from your HSA, line 14a will show $12,000.
Line 15 is the amount of money you spent on qualified medical expenses. In the cancer example, you would put $12,000 on line 15. That means the amount you withdrew matched the amount you spent on eligible expenses.
That means you don’t owe a single penny on the amount you withdrew.
In this example, if you chose to withdraw more than $12,000 (to cover non-medical expenses), you would owe taxes on the additional funds plus a 20% penalty tax. Ouch! The details on these are found in lines 16 through 17.
Penalty Taxes for Not Maintaining HDHP Coverage
In general, the rules for HSA taxes are pretty easy. But there is one wrinkle called the “testing period” for HSA coverage. Essentially, you have to maintain high-deductible health insurance coverage for an entire tax year to qualify for the full contribution amount in both the current tax year and the previous tax year.
If you qualify for HDHP coverage in November 2019, and you load your HSA with $3,450, and then load it again in January 2020 with $3,450, and then switch insurance to a lower deductible plan, you will face a penalty. The penalty is the income tax you would have owed on part of the HSA contribution plus a 10% penalty tax.
However, if you only have partial HDHP coverage, then you can only make a partial contribution. You basically take the maximum annual contribution and multiply by the number of months you're eligible to make the correct contribution and avoid the penalty.
The details for this are in section 3, lines 18 through 21. Since the penalty is steep, be careful when you change insurance plans in the middle of the year. It can lead to some tax penalties if you aren’t careful about maintaining your high-deductible eligibility.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him here and here.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.
If employer reduced W-2 block 1 wages by the HSA contributions, it seems no deduction is allowed because wages were already reduced. But Form 8889 has no place to show this. Please advise.
Correct, if everything you did was via your employer/W2, you have nothing to report on this form. Your tax software will handle everything appropriately.
I contributed $5200 to my HSA through payroll reduction. Then $1800 was sent directly to my HSA account by my healthcare plan taking me to the maximum $7000 limit.
My wages in Box 1 of the W-2 does appear to take into account the $5200 payroll reduction, however, the $5200 is not showing in Box 12 on my W-2. Is this normal? Does it have to be reported in Box 12?
I want to make sure I complete the Form 8889 properly but this is stumping me.
Thanks for your helpful site.
You should have a “W” code in Box 12 for your HSA contributions through payroll. You might need to speak to your employer if this is not there to get that corrected. You’d then report the additional outside of that.
What a confusing form. My question still is– if I contribute $4500 to my HSA for the 2019 year, does that give me a $4500 tax deduction? I am over 55, have been covered all year and made no changes. Would appreciate the clarification.
If you contribute to your HSA now (by April 15) for 2019, you would use this form to claim your deduction.
Great article, thanks!
I over-contributed to my HSA last year, and immediately withdrew the excess contribution. I got a 1099-SA with a code 2 distribution. I’m using FreeTaxUSA and its questionnaire is somewhat confusing and I was missing one key question, so the 8889 wasn’t getting filled out right. But I read your article, read thru the IRS 8889 instructions, and figured it out.
IRS did an excellent job again turning something simple into a complex nightmare. But your article was clear and went straight to where IRS’s poor choice of words lead to blatant confusions: really? Employer contribution? They couldn’t use your words such as “contribution made via employer facilitated pay-roll deductions”?
Thank you, for being the clear mind.
I do have a question if I may, since I am a first time HSA user. It appears that my HSA distribution toward expenses incurred in 2019 but only refunded in early 2020, was not documented in my 2019 1099-SA. This may not matter for 2019 tax, but I am just curious how the math (nightmare) is going to work in tax year 2020, when I fill out this form and have to explain that some of the distribution I received in 2020 was actually for expenses incurred in 2019 (by which time this 2020 8889 form probably wouldn’t have a spot for 2019 “contributed but undistributed funds”? (now you know what I mean by “complex nightmare”:)) Thanks so much for your time
It doesn’t matter – you report your distributions, and you report your qualifying amount. If they match, it’s all good. You’ll only get asked if audited, so save your receipts. You can withdraw from your HSA anytime into the future. Unlike an FSA where it has to be plan year, HSA is lifetime. So, you could theoretically let the HSA grow from 20 years, save your receipts along the way, and then request a tax-free distribution. In fact, that’s how we prefer to use our HSA – as a tax-free investment vehicle.
Thanks Robert. Just wanted to make sure I understand:
So you are saying — as long as the 2019 distribution matches 2019 qualifying amount, that’s all that matters.
But my question is — my “2020 distribution” will be more than my “2020 qualifying amount”, because part of my “2020 distribution” in fact was reimbursement for expenses incurred in 2019, not 2020.
Yes, it doesn’t matter. You could have incurred the expense in 2019 and taken the distribution for said expense in 2025. As long as it qualifies, you’re good.
Note, the line says “Qualified medical expenses paid with distribution” – no year. That’s what matters.
Thank you so much Robert. The more I read what you wrote, the more I wonder why IRS cannot speak clearly like you do.
If it’s ok, I would like to first share my understanding of the form with you and see if I got it right.
Part I is to make sure that you did not contribute more than your annual limit FOR the tax year (not IN the tax year). Part II is to make sure that you did not take out more than you had eligible receipts for, IN the tax year (not FOR the tax year). Part III is to make sure you did not contribute more than your HDHP coverage allowed FOR the tax year.
Assuming this understanding is correct, I think I have identified the source of my confusion. That is, in Part I we are supposed to cite line W for the total amount contributed FOR 2019. But in Part II, we are only asked to justify (line 15) what we took out IN 2019 (line 14a); this amount can be FOR any previous year — all that matters is that line 15 and line 14a are the same. My confusion is that I thought Part I and II need to match, but your point is that only line 15 and line 14a have to match. Did I get that?
Again assuming the above is correct, I think my initial question was really about tax year 2020, because that would be the first time I had to deal with the amount I took out IN 2020 but was FOR expenses of 2019. In 2020, let’s say we actually took out $1000 for eligible expenses incurred in 2019, and took out another $3500 (contribution limit) for eligible expenses incurred in 2020. In that case, my 2020 Form 8889 would say $3500 contribution in Part I, and $4500 distribution for both line 14a and line 15 in Part II, correct? And the key point here is that there is nothing wrong with Part II (4500) being greater than Part I (3500), as long as every single transaction was eligible.
The above understanding then helps me understand for the first time what you said in your article about HSA as secret IRA. Your point is that — as long as you contribute within the annual limit, that money can stay in the HSA untouched, and growing. Instead of putting in $3500 every year and using it up right away every year, you can, say, put in $2500 every year and in 20 years that same amount will have grown to be $3500 — so when you take out the $3500 in year 2039 to pay for the $3500 you used in 2019, you have just saved yourself $1000 dollars. Did I get the concept right?
Lastly, I wanted to talk about this sentence in your article:
“If you qualify for HDHP coverage in November 2019, and you load your HSA with $3,450, and then load it again in January 2020 with $3,450, and then switch insurance to a lower deductible plan, you will face a penalty.”
This sentence makes perfect sense to me. But the definition of a testing period in Instructions 8889 doesn’t:
“(for example, December 1, 2019 – December 31, 2020)”. This language sounds as if, in order for you to be eligible for HSA max amount for tax year 2019, you would have to have the HDHP for the entire year of 2020 as well. This does not make any sense. What if I was on HDHP for the entirety of 2019, and had HSA maxed out for 2019, and then chose a different plan for 2020, and did not contribute a penny to HSA in 2020? That seems to be ok according to your sentence, but not “eligible” according to the Instruction 8889 testing period example?
Thank you so much for your time.
You’re on the right track here. And over 20 years, that money should grow a LOT more. And it can be used for lots of things later in life (like Medicare, etc), so the value is really in letting it grow and not taking anything out if you can afford to.
Maybe the sentence isn’t clear, but you need to be eligible for each month of the year. So if you switch in 2020, you can’t contribute for 2020 except for any qualifying months (for example you could have 6 months qualifying/eligible, and make a 50% contribution to your HSA). Also note: you can make your HSA contribution for 2019 all the way until the tax deadline, just like an IRA.
Really sorry to bother you Robert — was hoping that this wouldn’t be an issue but looks it might:
I am using the IRS Free Fillable Form to file tax, and the form “pre-populates” my name and MY social security number on every sub-form (including the 8889 form), because I am the main filer for 1040. However, the HSA is under my wife’s name, so I was going to put her SSN for the top box “SSN of HSA beneficiary” — but the system would not let me change it. Is this a problem? Thanks so much.
I learned the hard way, that even if the HSA is in my name (wife), the main spouse (my husband) whose SSN # has been entered on the taxes year after year, has to remain the same if you are still married and filing jointly. I was told by the IRS that this is how they identify the account so keep the same SSN # on the top of the form.
I have a question about the over 55 additional contribution amount. My husband and I have family coverage with a HDHP through his work. We each also have our own HSA accounts. I had my account when I had individual coverage several years ago prior to going on his work insurance family plan. We are both over 55, had family coverage all year, are not on medicare, had no other coverage. We are eligible to contribute $7000 to our HSA’s since we have family coverage. Are we each eligible to contribute an additional $1000 since we each have separate HSA’s and are over 55 (total contribution would be $9000), OR is only one over 55 contribution allowed (total contribution of $8000)? From what I have read, I feel each of us should be able to contribute additional $1000 to our individual HSA accounts for total combined contribution of $9000. I am using H&R Block Premium to complete 2019 taxes. If I enter combined contributions of $8000 then no penalty is calculated. If I enter additional contribution which sums to over $8000 then penalties calculate. I feel this is calculating incorrectly.
I’m not sure how H&R Block Online is handling it, but you should be filling out two separate From 8889 for each of your individual HSA accounts. Then, on each 8889/HSA, you can make the original contribution ($3,500 for 2019), and then catch-up $1,000.
If you’re only filing one From 8889, it’s incorrect. You need to account for each of your individual accounts.