Form 1099-SA Distribution Codes Explained for 2026

Form 1099-SA Distribution Codes

Box 3 of Form 1099-SA requires a distribution code that indicates the type of distribution from a Health Savings Account (HSA), Archer MSA, or Medicare Advantage MSA. The correct code helps recipients determine the tax treatment of their distribution.

Distribution Code Reference

Code 1: Normal Distribution

The most common code, Code 1 is used for regular distributions from the account. The tax treatment depends on how the funds are used:

• Qualified medical expenses: Distribution is completely tax-free
• Non-qualified expenses (under age 65): Distribution is taxable and subject to 20% additional tax
• Non-qualified expenses (age 65 or older): Distribution is taxable but no 20% penalty

The account holder must keep records proving that distributions were used for qualified medical expenses.

Code 2: Excess Contributions

Use Code 2 when distributing excess contributions and their earnings. This situation occurs when more than the annual contribution limit was deposited into the account.

If excess contributions are withdrawn by the tax filing deadline (including extensions), only the earnings portion is taxable. If not timely withdrawn, a 6% excise tax applies to the excess amount for each year it remains in the account.

Code 3: Disability

Code 3 applies when the account holder becomes disabled as defined under IRC Section 72(m)(7). Distributions taken due to disability are exempt from the 20% additional tax, even if used for non-qualified expenses.

To qualify, the account holder must be unable to engage in any substantial gainful activity due to a physical or mental condition that is expected to result in death or be of long, indefinite duration.

Code 4: Death (Non-Spouse Beneficiary)

Use Code 4 when the account holder dies and the beneficiary is not the surviving spouse. The fair market value of the account on the date of death is includible in the beneficiary's gross income.

Enter the fair market value on the date of death in Box 4 of Form 1099-SA.

Code 5: Prohibited Transaction

Code 5 is used when the account holder engages in a prohibited transaction, causing the account to cease being an HSA. Examples include:

• Using HSA funds as collateral for a loan
• Purchasing property for personal use with HSA funds
• Borrowing money from the HSA

The fair market value of the account is treated as distributed and is subject to income tax plus the 20% additional tax if the account holder is under 65.

Code 6: Death (Spouse Beneficiary)

Use Code 6 when the account holder dies and the surviving spouse is the designated beneficiary. The account automatically becomes the spouse's HSA, and there is no immediate income tax consequence.

The surviving spouse can continue to use the account for qualified medical expenses tax-free and can make additional contributions if eligible.

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External Resources

• IRS: About Form 1099-SA
• IRS Publication 1220: FIRE Specifications