1099-SA Box 3 Codes: All Six, Tax Treatment, and Age 65

Box 3 of Form 1099-SA holds a one-digit code, 1 through 6, that tells the IRS why money came out of your HSA, Archer MSA, or Medicare Advantage MSA. Each of the six 1099-SA Box 3 distribution codes carries a different tax result: some distributions are tax-free, some are taxable as ordinary income, and some pick up an extra 20% additional tax on top. The code your custodian assigns doesn’t decide your tax bill by itself, but it sets the starting point, and knowing what each number means is how you catch a coding error before it costs you.

What Each Code Means

Code 1: Normal Distribution

This is the default. The custodian uses Code 1 whenever the withdrawal doesn’t fit Codes 2 through 6, so it covers money you spent on medical care, money you spent on anything else, and payments the custodian sent directly to a provider. It also covers distributions to a surviving spouse after the year of the account holder’s death, because the HSA has become the spouse’s own account by then. A withdrawal you rolled into another HSA within 60 days will show up as Code 1 too; the custodian has no way to know you completed a rollover.¹

Code 2: Excess Contributions

If you put more than the annual limit into the account and pulled the extra out before your tax filing deadline including extensions, the custodian codes that withdrawal as a 2. The earnings on the excess sit separately in Box 2 of the same form.

Code 3: Disability

Code 3 applies to distributions made after the account holder becomes disabled. The IRS uses a strict definition here: unable to engage in any substantial gainful activity because of a physical or mental impairment expected to result in death or last indefinitely.¹

Code 4: Death Distribution (Estate or Year of Death)

Code 4 covers two situations. First, any distribution to any beneficiary in the year the account holder dies. Second, distributions to the decedent’s estate after that year. The label reads “Death distribution other than code 6,” but in practice this is the estate-and-year-of-death code.

Code 5: Prohibited Transaction

Code 5 signals that the account was used in a way the rules forbid, such as pledging the HSA as collateral for a loan or engaging in a self-dealing transaction. Seeing this code is a serious problem, and the tax fallout is described below.

Code 6: Death Distribution to Nonspouse Beneficiary

Code 6 is used when a nonspouse beneficiary who isn’t the estate receives a distribution after the year the account holder died. A common example is an adult child who inherits a parent’s HSA and receives the funds the following calendar year.

One boundary worth noting up front: a direct trustee-to-trustee transfer between two HSAs isn’t reported on Form 1099-SA at all. If you moved your HSA from one custodian to another through a direct transfer and received a 1099-SA anyway, something was miscoded.¹

How Each Code Is Taxed

Code 1

A Code 1 distribution is tax-free and penalty-free only to the extent you spent it on qualified medical expenses. Any portion you used for something else gets added to your gross income and hit with an additional 20% tax.²

Qualified medical expenses are costs for medical care under IRC Section 213(d) for you, your spouse, or your dependents, provided no insurance or other source reimbursed them.³ Doctor visits, prescriptions, dental and vision care, over-the-counter medications, and menstrual care products all count. Health insurance premiums usually don’t, with a few exceptions: COBRA continuation coverage, long-term care insurance, health coverage while receiving unemployment benefits, and Medicare premiums other than Medigap once you turn 65.

Your custodian doesn’t know what you actually bought. Proving each distribution went to a qualified expense is your job, and the receipts should stay in your files indefinitely. If you completed a 60-day rollover that came through on a Code 1, you report it as a rollover on Form 8889 so you’re not taxed on it.

Code 2

When you pull excess contributions out on time, the excess amount itself isn’t taxed a second time; either it was never deducted or the deduction gets adjusted. What is taxable is the earnings on the excess, the figure in Box 2. Those earnings are income in the year the excess was contributed. The 20% additional tax doesn’t apply to a timely corrected excess.

Code 3

A disability distribution used for qualified medical expenses is fully tax-free, just like Code 1. Used for anything else, it’s ordinary income, but the 20% additional tax is waived.⁴

Code 4

Tax treatment turns on who inherits:

A surviving spouse takes the HSA as their own. No tax at transfer, and later distributions run under Code 1 because the account is now theirs.²
If the estate is the beneficiary, the fair market value of the HSA goes on the decedent’s final income tax return.²
A nonspouse beneficiary receiving funds in the year of death: the HSA stops being an HSA, and the fair market value becomes taxable income to the beneficiary that year. That amount can be reduced by any of the decedent’s qualified medical expenses the beneficiary pays within one year of the death.

Code 5

A prohibited transaction doesn’t just tax the offending withdrawal. The entire account loses HSA status as of January 1 of the year the prohibited transaction happened. The full fair market value on that date is treated as distributed to you, included in gross income, and subject to the 20% additional tax.² Using the account as loan collateral or transacting with a disqualified person are two ways to trigger it.

Code 6

The fair market value is taxable income to the nonspouse beneficiary in the year the account holder dies, reduced by any of the decedent’s qualified medical expenses the beneficiary pays within one year of the death.² Code 6 covers distributions after the year of death; the same payment made in the year of death itself would carry Code 4 instead.

What Changes at Age 65

Once you turn 65, the 20% additional tax on non-qualified HSA distributions goes away. Regular income tax still applies to any amount you don’t spend on qualified medical care, but the penalty portion is off the table.² The same relief applies after disability or death.

The 1099-SA will still show Code 1 in Box 3 no matter what you spent the money on; your custodian isn’t tracking your age against your spending. You claim the exception on Form 8889 when you file.

A Medicare Advantage MSA Wrinkle

If your 1099-SA is for a Medicare Advantage MSA rather than a standard HSA, qualified medical expenses are limited to expenses of the account holder only. You can’t use it tax-free for a spouse’s or dependent’s medical costs.⁵ The codes and reporting mechanics otherwise match.

If the Code Looks Wrong

Custodians sometimes assign the wrong number. If Box 3 doesn’t match what actually happened, call the custodian and ask for a corrected 1099-SA. IRS instructions direct custodians to correct any filed 1099-SA as soon as they become aware of the error, and the corrected version arrives with an “X” in the CORRECTED box at the top.¹

If the custodian won’t cooperate, you can still file according to the true nature of the distribution and keep your documentation ready to defend it. The cleanest path is the corrected form.

Watch particularly for excess contributions coded as Code 1 instead of Code 2. Form 8889 handles those two situations differently, and the miscoding can push you into overpaying. Flag it with the custodian before you file.

Distributions That Shouldn’t Have a Code At All

If your custodian released money by mistake and the amount was repaid to the account, no 1099-SA should have been issued. IRS instructions tell custodians not to report a mistaken distribution on Form 1099-SA and not to treat the repayment as a contribution on Form 5498-SA.¹ Getting one anyway means asking the custodian to void it.

State Tax Doesn’t Follow Federal

California and New Jersey don’t recognize HSA tax benefits at the state level. In those states, contributions are treated as state taxable income, investment earnings inside the account are taxed, and distributions for medical expenses aren’t state-tax-free. A Code 1 distribution you spend on qualified medical care could owe no federal tax while still generating a state tax bill on the underlying earnings. Check the state rules before assuming a fully tax-free result.

1
Internal Revenue Service. Instructions for Forms 1099-SA and 5498-SA
2
Internal Revenue Service. Publication 969 (2025), Health Savings Accounts and Other Tax-Favored Health Plans
3
Office of the Law Revision Counsel. 26 U.S. Code 223 – Health Savings Accounts
4
Internal Revenue Service. Instructions for Form 8889 (2025)
5
Office of the Law Revision Counsel. 26 USC 138 – Medicare Advantage MSA