Health Savings Accounts (HSAs) continue to be a popular tax-favored investment and medical expense reimbursement component of employee benefits packages. Individuals with qualifying high deductible health plan (HDHP) coverage can contribute to HSA bank accounts and use the contributions to pay for eligible medical expenses for themselves and eligible spouses and dependents. In addition, employers that offer HDHP coverage can contribute to HSAs on behalf of their qualifying employees or allow employees to contribute pre-tax dollars to the HSA through a Section 125 plan.
Unlike employer sponsored accounts (FSAs and HRAs), HSAs are individual accounts which require tax reporting by the individual account holder. When filing federal tax returns, the account holder must report contributions to and distributions from the HSA on IRS Form 8889 as an attachment to Form 1040. If both spouses have an HSA and filing taxes jointly, a separate Form 8889 is required for each spouse. Contributions by both the employee and employer must be reported, and contributions made by the employee through a section 125 plan are considered employer contributions for purposes of reporting. Distributions from the HSA also must be reported to certify that the distributions were used for eligible medical expenses. Distributions that are used for any non-eligible expenses are subject to a 20% excise tax penalty. Employers must report all employer contributions, including employee contributions through a Section 125 plan, in box 12 on the account holder's W-2 using Code W.