If you have a Health Savings Account (HSA), it’s important to understand how it’s treated before tax time. HSAs come with several tax advantages, and being aware of the rules can help you avoid common mistakes while maximizing the benefits available. This guide breaks down the key tax details you need to know, including required forms, how distributions are handled, and current contribution limits.

1. Who Can Contribute to an HSA?

To contribute to an HSA, you must be covered by a High Deductible Health Plan (HDHP). A HDHP is a specific type of health insurance plan that meets minimum deductible and maximum out-of-pocket cost thresholds set by the IRS each year.

You cannot contribute to an HSA if:

• You are enrolled in Medicare.
• You are listed as a dependent on someone else’s tax return.
• You have other non-HDHP health coverage (such as a general-purpose FSA or secondary insurance that disqualifies you).

2. Reporting Your HSA on Your Tax Return

You will typically receive the following forms:

• Form 1099-SA: Shows your HSA distributions.
• Form 5498-SA: Reports contributions (may arrive after tax day but should be kept for your records).
• Form 8889: You will include this with your federal return to report all HSA activity and calculate deductions, income, and penalties (if any).

If you contribute to your HSA outside of payroll, be sure to deduct those contributions on your tax return.

3. Tax Treatment of HSAs

HSAs come with three key tax benefits:

• Contributions made through payroll are usually pre-tax. If you contribute on your own (after-tax), you can deduct those contributions on your tax return, as long as you do so before the tax filing deadline.
• Growth in the account (including interest) is not taxed.
• Withdrawals for qualified medical expenses are tax-free.

If you withdraw HSA funds for anything other than qualified medical expenses before the age of 65, the amount is subject to income tax and a 20% penalty. After age 65, non-medical withdrawals are taxed as regular income, but no penalty applies.

Not sure what counts as a qualified medical expense? Check IRS Publication 502 for a full list. Most major HSA providers also offer easy-to-read lists.

HSA Contribution Limits (Updated for 2025 and 2026)

The IRS adjusts HSA contribution limits annually for inflation. Below are the most recent limits for 2025 and the projected increases for 2026:

These limits apply to the total contributions made by you and your employer combined. If you are 55 or older, you can make an additional catch-up contribution of $1,000 per year.

4. What If You Overcontribute?

If you contribute more than the annual limit, the excess amount is considered taxable income, and if not corrected by the tax filing deadline (including extensions), it may also be subject to a 6% excise tax each year it remains in the account.

To avoid penalties:

• Withdraw the excess amount (and any earnings on it) before the tax deadline.
• Report the excess and the withdrawal on your tax return.

Mitchell Erickson, CPA and Manager, comments,

“A Health Savings Account can offer great tax advantages, but navigating the rules can be tricky. Here at CDS we offer expert guidance to ensure you’re making the smartest contributions, tracking expenses correctly, and staying ahead of tax changes. So you can focus on saving, not stressing.”

5. Making the Most of Your HSA

An HSA is a powerful tool for managing healthcare expenses while maximizing tax advantages. By understanding contribution limits, tax treatment, and reporting requirements, you can make the most of your HSA while avoiding costly mistakes. Always stay updated on IRS regulations to ensure compliance and optimize your savings.

Visit with one of our experts at (888) 388-1040 if you have any questions on your specific situation.