HSA Reporting: When is No Reporting the Right Move?
By Jodie Norquist, CIP, CHSP
If you work with health savings accounts (HSAs), you already know the IRS wants a paper trail for just about everything. But sometimes the smartest (and most compliant) move is not reporting a transaction at all.
Knowing when to leave something off a Form 1099-SA or Form 5498-SA isn’t about cutting corners. It’s about understanding the IRS rules well enough to avoid creating confusion, unnecessary corrections, or red flags.
Let’s break down two common situations where “no reporting” is the right reporting method.
How Should Financial Organizations Handle Excess Employer Contributions?
Mistakes happen. An employer might accidentally contribute too much to an employee’s HSA or maybe they miscalculated eligibility or forgot to stop a contribution after an employee changed coverage.
If you catch this mistake before year-end, the fix is simple.
Return the excess plus the net income attributable (NIA) to the excess, which is a pro rata portion of the net income earned on all assets in the HSA (whether positive or negative) during the period that the HSA held the excess contribution.
Don’t report the contribution or the distribution on any IRS forms.
The key here is timing. If it’s not fixed by the end of the tax year, then the extra amount becomes taxable. That means if the employer fails to recover the amount by the end of the tax year, then
the employer needs to include the excess amount as wages in Box 1 of the employee’s Form W-2, Wage and Tax Statement, for the year in which the employer made the contribution, or
the employee must report the excess amount as “Other income” on his tax return.
Example: The Sweet Life Bakery made HSA contributions to all of its eligible employees in January 2025. In July 2025, the bakery’s owner discovered that it accidentally contributed $4,800 to one of its employees (Ted Adams) who only had self-only coverage during 2025. Once it discovered the error, the bakery asked the financial organization holding Ted’s HSA (SkyBlue Credit Union) to return the $500 excess contribution and NIA. The credit union returned the excess contribution and NIA to the bakery in August 2025. The credit union did not report the initial deposit of the $500 excess contribution or the subsequent distribution. Because the excess contribution was returned to the bakery before the end of its 2025 tax year, the bakery does not have to include the $500 excess on Ted’s 2025 Form W-2.
An employer may recover contributions in other situations as well. In the past, an employer’s ability to recoup HSA contributions was believed to be limited by the guidance contained in IRS Notice 2008-59. Then in late 2018, the IRS released Information Letter 2018-0033, which contains an expanded list of circumstances under which an employer may recoup HSA contributions transmitted to a custodian or trustee.
What are Mistaken Distributions?
A mistaken distribution occurs when an HSA owner takes a distribution to pay for what she mistakenly believes is a qualified medical expense. The HSA owner may “correct” the mistake by returning the distributed assets to the HSA and acting as if the distribution had not occurred.
Your organization is not required to accept returns of mistaken distributions. IRS Notice 2004-50 explains that financial organizations that do accept mistaken distributions may rely on the HSA owner’s representation that the distribution was a mistake. The deadline for repaying a mistaken distribution is April 15 following the first year the HSA owner knew or should have known that the distribution was a mistake.
Example: On May 9, 2025, John Nelson takes a $200 HSA distribution to pay for a pair of prescription sunglasses. John later finds out that he did not need to take an HSA distribution because prescription sunglasses are covered under his vision plan. John is reimbursed by his insurance company on July 1, 2025. He then asks to move $200 from his checking account into his HSA at ABC Bank. ABC Bank accepts the return of the mistaken distribution and moves $200 into John’s HSA. ABC Bank does not report the $200 distribution on the 2025 IRS Form 1099-SA and instead uses a nonreportable transaction code (e.g., the same code used to post earnings) to deposit the $200 into the HSA.
Note that in the case of a mistaken distribution that has already been reported on Form 1099-SA, the financial organization should issue a corrected Form 1099-SA.
Are There Other Possible Nonreportable Transactions?
Like other types of accounts, HSAs can be a target for fraudulent activity. Clients may suddenly find themselves unsuspecting victims of illegal, unauthorized transactions. Because the IRS has yet to release official guidance on this issue, your organization should create and follow its own internal procedures for handling fraudulent HSA transactions. When fraudulent activity occurs, make sure your organization’s legal counsel is aware of the issue and agrees with any steps taken after the activity is identified.
Example: In February 2025, Piper Smith’s HSA debit card was stolen and $900 was illegally taken from her HSA. In August 2025, Piper was reimbursed for the money that was stolen from her HSA. She asks Greenway Bank to redeposit $900 into her HSA. After gathering proof (such as police reports, account activity reports) that $900 was illegally taken from Piper’s HSA, Greenway Bank’s legal counsel and management agree to use a nonreportable transaction code to deposit the money back into Piper’s HSA. The bank also suppresses the distribution reporting. Greenway Bank will keep detailed notes—including steps taken to verify that the money was illegally distributed—in Piper’s HSA file.
The bottom line is, sometimes not reporting certain HSA transactions is the right call, as long as you are working within IRS rules and keeping excellent documentation.
