Table of Contents
1099-SA Distribution Code 1 – If you’ve received a Form 1099-SA in your mailbox or through your financial institution’s portal, you might be wondering what it means—especially if Box 3 shows “Code 1.” This form is crucial for anyone with a Health Savings Account (HSA), Archer Medical Savings Account (Archer MSA), or Medicare Advantage MSA (MA MSA). In this comprehensive guide, we’ll break down the meaning of 1099-SA Code 1, its tax implications, how to report it, and tips to avoid common pitfalls. Whether you’re filing taxes for 2025 or planning ahead for 2026, understanding this can help you maximize tax benefits and stay compliant with IRS rules.
What is Form 1099-SA?
Form 1099-SA is an IRS information return that reports distributions (withdrawals) from certain tax-advantaged health accounts. It’s issued by the financial institution managing your account if you took any distributions during the tax year. The form includes details like the total amount distributed (Box 1), earnings on excess contributions (Box 2), the distribution code (Box 3), fair market value on date of death if applicable (Box 4), and the type of account (Box 5). These distributions could be payments directly to you or to medical providers on your behalf.
The primary accounts covered are:
- Health Savings Accounts (HSAs): Popular for high-deductible health plans, allowing pre-tax contributions for medical expenses.
- Archer Medical Savings Accounts (Archer MSAs): Similar to HSAs but for self-employed individuals or small businesses; no new accounts since 2007.
- Medicare Advantage MSAs (MA MSAs): For Medicare beneficiaries, with funds used for qualified health costs.
You won’t receive this form for trustee-to-trustee transfers or rollovers between accounts, as they’re not considered taxable distributions. Institutions must send Copy B to you by January 31 following the tax year (e.g., by January 31, 2026, for 2025 distributions).
What Does Code 1 Mean on Form 1099-SA?
Box 3 of Form 1099-SA contains a distribution code that categorizes the type of withdrawal. Code 1 stands for “Normal distributions.” This is the default code used when no other specific code applies, such as for excess contributions or disability-related withdrawals. It covers:
- Withdrawals made to the account holder.
- Direct payments to medical service providers for qualified expenses.
- Certain death distributions to a surviving spouse after the year of death.
For context, here’s a quick overview of all distribution codes in a table:
| Code | Description | When It Applies |
|---|---|---|
| 1 | Normal distributions | Standard withdrawals for qualified or non-qualified uses; default if no other code fits. |
| 2 | Excess contributions | Return of over-contributions and earnings. |
| 3 | Disability | Distributions due to permanent disability under IRC Section 72(m)(7). |
| 4 | Death distribution (other than Code 6) | To estate or non-spouse in year of death or after. |
| 5 | Prohibited transaction | Violations of account rules, leading to full taxation. |
| 6 | Death distribution after year of death to non-spouse beneficiary | Specific post-death payouts excluding estates. |
If your 1099-SA shows Code 1, it doesn’t automatically mean the distribution is tax-free—it depends on how you used the funds.
Tax Impact of 1099-SA Code 1 Distributions
The tax treatment of Code 1 distributions hinges on whether the funds were used for “qualified medical expenses.” These include doctor visits, prescriptions, hospital stays, and other IRS-approved health costs (see IRS Publication 502 for a full list).
Tax-Free Scenario
- If used for qualified expenses: The distribution is excluded from your gross income. No income tax, no additional penalties. This is the ideal outcome for HSAs, Archer MSAs, and MA MSAs, preserving the triple tax advantage (pre-tax contributions, tax-free growth, tax-free withdrawals).
Taxable Scenario
- If not used for qualified expenses: The amount in Box 1 is included in your gross income. Plus, if you’re under age 65 and not disabled, you’ll face a 20% additional tax penalty. Exceptions include:
- Distributions after age 65 (penalty waived, but still taxable if non-qualified).
- Disability or death.
For earnings on excess contributions (Box 2), these are always included in Box 1 and taxable if withdrawn.
Special Cases
- Mistaken Distributions: If you withdrew funds by mistake (e.g., believed it was qualified but wasn’t), you can repay them to the account by the tax filing deadline (without extensions) of the following year. This avoids taxation and penalties; don’t report the repaid amount on your return.
- Death Distributions: For Code 1 to a spouse, the account becomes theirs; post-death earnings may be taxable.
- MA MSA Specifics: Excess contributions returned to the Department of Health and Human Services aren’t reported.
For 2025 and 2026 tax years, no major changes to Code 1 rules are noted, but e-filing thresholds have dropped to 10 returns, and address fields on related Form 5498-SA are updated.
How to Report 1099-SA Code 1 on Your Tax Return
Don’t attach Form 1099-SA to your return—use it to complete other forms:
- HSAs: Report on Form 8889 (Health Savings Accounts). Enter distributions on Line 14a, qualified expenses on Line 15.
- Archer MSAs or MA MSAs: Use Form 8853 (Archer MSAs and Long-Term Care Insurance Contracts).
- Taxable amounts flow to Form 1040, Schedule 1 (additional income) and Form 5329 (additional taxes on distributions).
Keep records of medical expenses for at least three years in case of audit. If you use tax software like TurboTax, it can import the form and guide you through.
Common Mistakes and How to Avoid Them
- Misclassifying Expenses: Not all health costs qualify (e.g., gym memberships usually don’t). Double-check with IRS Pub 502.
- Forgetting Repayments: Use the “return of mistaken distribution” rule to fix errors without tax hits.
- Ignoring Penalties: Under-65 individuals often overlook the 20% tax on non-qualified uses.
- Multiple Accounts: File separate forms if you have both HSA and MSA distributions.
Penalties for non-filing or errors can include fines under IRC Sections 6721-6724; consult a tax pro if unsure.
FAQs About 1099-SA Code 1
Is a Code 1 distribution always tax-free?
No, only if used for qualified medical expenses. Otherwise, it’s taxable with potential penalties.
What if I didn’t use the money for medical expenses?
Report it as income on your return and pay the 20% penalty if applicable. Consider repaying if eligible.
Do I need to report rollovers?
No, rollovers aren’t distributions and aren’t on 1099-SA; they’re on Form 5498-SA.
How does Code 1 differ from other codes?
It’s for normal uses, unlike Code 2 (excess) or Code 3 (disability), which may have different tax treatments.
What if my 1099-SA is wrong?
Contact your account custodian for a corrected form.
For the most up-to-date advice, visit IRS.gov or consult a certified tax advisor. This guide is based on 2025-2026 rules and may change with new legislation.