Quick Answer: HSA and FSA accounts offer significant tax benefits, but there are some rules to follow. HSAs require filing Form 8889 each year. FSA tax reporting is simpler since it's handled through your employer. Here's what matters.
Important Disclaimer
Crates Health does not provide tax advice. For specific tax questions about your situation, please consult a qualified tax professional. This article provides general educational information only.
HSA Tax Benefits (The Triple Tax Advantage)
Tax-deductible contributions - Money you put in reduces your taxable income
Tax-free growth - Interest and investment gains are not taxed
Tax-free withdrawals - No taxes when used for qualified medical expenses
This makes HSAs the only account type with a triple tax advantage - no other savings vehicle offers all three.
HSA Tax Filing: Form 8889
If you have an HSA, you must file IRS Form 8889 every year you have the account - even if you didn't contribute or withdraw anything that year.
What you'll need:
Form W-2 - Shows employer contributions (Box 12, Code W)
Form 5498-SA — Shows total contributions (from your HSA admin, arrives by May)
Form 1099-SA — Shows distributions/withdrawals (from your HSA admin, arrives by February)
Common mistake to avoid:
Not filing Form 8889. If you skip this form, the IRS may assume ALL your HSA distributions were non-qualified - and send you a letter (CP2000 notice) saying you owe income tax + a 20% penalty. This is fixable, but stressful and avoidable.
What Happens If I Use HSA Money for Non-Medical Expenses?
Before age 65:
The amount is included in your gross income (you pay income tax)
PLUS a 20% additional tax penalty
Example: $500 non-qualified withdrawal = income tax on $500 + $100 penalty
After age 65:
The amount is included in your gross income
No 20% penalty - effectively makes your HSA work like a traditional IRA for non-medical expenses
Accidental non-medical purchase:
If you accidentally used your HSA card for something non-medical: 1. Return the money to your HSA before tax time 2. Make sure it's coded as a "return of mistaken distribution" (not a regular contribution) 3. Contact your HSA admin for the specific form needed
FSA Tax Implications
FSAs are simpler from a tax perspective: - Contributions are pre-tax (deducted from your paycheck before taxes) - Qualified withdrawals/reimbursements are not taxed - Your employer handles the tax reporting - You generally don't need to file any special tax forms for your FSA
State Tax Exceptions
Most states follow federal HSA tax treatment, but two exceptions:
California: HSA contributions are NOT deductible on your state return, and investment growth IS taxable at the state level
New Jersey: HSA contributions are NOT deductible on your state return
If you live in CA or NJ, you'll still get the federal tax benefits, but not the state-level benefits.
Keep Your Records
Whether you have an HSA or FSA, keep documentation of all qualified expenses:
Itemized receipts for every purchase you claim
LMNs from Crates Health
Keep records indefinitely or at least 10 years — the IRS can audit you up to 10 years after a transaction. Crates stores your LMNs and receipts on your dashboard for easy access.
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Still Need Help?
For general HSA/FSA questions, chat with us or email [email protected]! For specific tax situations, we recommend consulting a tax professional.