New This Year: Forms 1099-SA and 5498-SA Sent by January 31, 2012

We are acting on feedback from clients who tell us that waiting until May for us to send Form 5498-SA is not helpful, as many of you file your tax report by April 15 or earlier.  Expect to receive all tax-related reports on your HSA account by the end of this month. In case you’re wondering about those reports, below is a quick summary:

• Form 1099-SA – This form records all the disbursements you’ve generated in 2011. For many of us, we associate any 1099 form in the context of taxable income.  That is NOT the case with HSAs.  Form 1099-SA simply tells the IRS what amounts were spent from your HSA account and whether any of those dollars were used for “nonqualified” expenses. Sterling will also send the IRS an electronic version of Form 1099-SA. Please note that we will report to the IRS that distributions were for qualified medical expenses except in those instances in which we had knowledge of an unqualified distribution or if you closed your account. If your records indicate to the contrary, please let us know, so that we may correct our files. If you spent zero dollars out of your HSA account in 2011, then you will NOT receive Form 1099-SA. Please know that account fees are not reported as distributions from your account. We are not tax advisors, but we understand that these fees may also be deductible as “Other Miscellaneous Deductions”. Please consult your tax preparer.

• Form 5498-SA – This form records all contributions made to your HSA account in 2011, regardless of who makes them. If you did not make any contributions, then you will not receive this form. Note that you are allowed to make contributions for the 2011 tax year up to April 15, 2012. If you decide to do so, then we will reissue your form 5498-SA by no later than May 31, 2012. Please remember that unless you tell us differently, any contributions received in 2012 will be posted to your account as 2012 contributions. If you intend the contributions for 2011, then you need to note that online (the pull down category allows for “prior year” contributions) or write it on the check.

While Sterling sends you forms that can help you prepare your tax return, these forms are not to be sent to the IRS. Instead, you need to send Form 8889 along with your tax return. This form can be obtained from the IRS website here: http://www.irs.gov/pub/irs-pdf/f8889.pdf. While we can’t complete this form for you, your statement is a key source of information and should help you. Again, if you plan to add more deposits to your HSA account for tax year 2011, then you will need to add those amounts to what is included on the attached statement when you file your taxes. By the way, we’ve heard from many clients that filing your tax returns without Form 8889 could cause the IRS to give you special attention, so please include this form in your tax filing.

2011 Contributions – In case you’re planning to maximize your tax-deductible contribution for 2011, please remember that you and your employer may contribute in total up to $3,050, if you are under 55 years of age and have single HSA compatible health coverage, and up to $6,150 if you are under 55 years of age and have family HSA compatible health coverage. If you are 55 years old and over and not receiving Medicare benefits, then you may also contribute an additional “catch-up” contribution of  $1,000. Your spouse is also entitled to a catch-up contribution if he/she meets the eligibility requirements noted above. For your spouse to make the catch-up contribution, he/she will need to open a spousal HSA account. It’s a quick and easy process and we’d be happy to help.

Problem With Excess Contributions – Please compare your year-end statement against the contribution limits noted above. If you’ve contributed in excess of those limits, then you need to let us know immediately so we can help you correct this. If you fail to do so, then the IRS will levy an excess contribution penalty. To prevent that from happening, please call us at 800.617.4729. Customer service representatives are available Monday – Friday from 8 am to 6 pm Pacific time.

Tax Issues for Residents of California, Alabama and New Jersey – While HSA contributions enjoy federal tax advantages, remember that if you live in California, Alabama or New Jersey, your contributions are not tax-advantaged for state income tax purposes. That means for residents in these three states, contributions are not tax-deductible, employer contributions are considered taxable income, and any interest earned is considered income for state tax purposes.

2012 Contributions – In 2012, the maximum amount that can be contributed to your HSA is $3,100 for accountholders under age 55 with single coverage and $6,250 for accountholders under age 55 with family coverage. “Catch-up” contributions of $1,000 for accountholders who are 55 years or over are allowed. Spouses age 55 and over may also contribute $1,000 towards a “catch up” account, but they must have a spousal HSA account.

Sterling does not offer tax advice, but if you have questions about this information, please call or email at 800-617-4729 or customer.service@sterlinghsa.com. Customer service representatives are available Monday – Friday from 8 am to 6 pm Pacific time.