A health savings account generates several documents that arrive at different times from different senders, and none of them is the return position by itself. For a 2025 individual return, the federal reporting runs through Form 8889, while California applies its own treatment to the same account.
This educational publication describes how the records fit together and where the federal and state reviews diverge. It does not determine eligibility, any contribution limit for a specific taxpayer, the taxable portion of any distribution, or any California adjustment amount.
- Which tax year and which account activity are being reported.
- The three parts of the HSA documentation file.
- Form 8889 and what it reconciles.
- Why California requires a separate review.
- Distributions that change the federal result.
1. Which Year and Which Account Activity
Eligibility to contribute is tested month by month. Publication 969 requires coverage by a high deductible health plan on the first day of the month, no other health coverage apart from the permitted types such as dental, vision, disability and long-term care, no enrollment in Medicare, and that the account holder not be claimed as a dependent on someone else’s return.
For 2025, the contribution limits were $4,300 for self-only high deductible coverage and $8,550 for family coverage, with an additional $1,000 for an account holder aged 55 or older at year-end. Employer contributions, including those routed through a cafeteria plan, reduce the amount the individual can contribute.
The last-month rule complicates the calendar in a way worth recording at the time. A person eligible on the first day of the last month of the tax year is treated as eligible for the whole year, but a testing period then runs from that month through the last day of the twelfth following month. If eligibility fails during that period for reasons other than death or disability, the contributions made only because of the rule become taxable income and attract a 10% additional tax.
2. The Three Parts of the HSA File
The documents separate cleanly into three groups, and each answers a different reporting question. Keeping them apart avoids the common error of treating a contribution summary as though it described withdrawals.
| Record | Sender | What it reports |
|---|---|---|
| Form 5498-SA | Account trustee | Total contributed to the account during the year |
| Form 1099-SA | Account trustee | Distributions taken from the account |
| Form W-2, box 12, code W | Employer | Employer contributions, including cafeteria plan amounts |
| Account statements | Account trustee | Interest, dividends and investment activity inside the account |
The fourth group is the one most often overlooked on a California return. Earnings generated inside the account are reported on statements rather than on an information return directed to the IRS, so they are easy to pass over when only the tax forms are gathered.
3. Form 8889 and What It Reconciles
Form 8889 is filed with Form 1040, 1040-SR or 1040-NR whenever there was any HSA activity during the year, including a year in which only an employer contributed. It reports all contributions, employer contributions and qualified HSA funding distributions among them, together with any distributions taken.
Qualified medical expenses are amounts paid for medical care under section 213(d) for the account holder, spouse and dependents, to the extent not covered by insurance or another source. Publication 969 notes that menstrual care products count as medical care, that expenses incurred before the HSA was established do not qualify, and that an expense paid with a tax-free HSA distribution cannot also be taken as an itemised deduction. Insurance premiums generally do not qualify, with exceptions such as long-term care coverage, continuation coverage and certain Medicare premiums for people aged 65 or older.
Excess contributions carry their own consequence. They are not deductible and generally incur a 6% excise tax for each year they remain in the account, unless they are withdrawn with the related earnings by the due date of the return, including extensions.
4. California Requires Its Own Review
California does not follow the federal treatment of these accounts, and the divergence shows up in more than one place on the return. The federal health savings account deduction appears as its own line on Schedule CA (540), at line 13 of Section C, Adjustments to Income from federal Schedule 1.
The contribution deduction is only the starting point. Because California does not treat the account as tax-favoured, activity generated inside it is reviewed under the ordinary state rules rather than being disregarded as it is federally.
| Item | Federal treatment | California review |
|---|---|---|
| Contribution deduction | Deduction allowed within the annual limit | Identified separately on Schedule CA (540), Section C, line 13 |
| Interest and dividends inside the account | Not taxed while in the account | Reviewed under the ordinary state rules for that income |
| Gains and losses inside the account | Not taxed while in the account | Reviewed under the ordinary state rules |
| Qualified distributions | Not included in income | Reviewed separately; the federal result does not carry over automatically |
The practical consequence is a record-keeping one. A California return may need account-level detail — interest, dividends and investment transactions inside the HSA — that the federal return never asks for. Gathering those statements during the year is considerably easier than reconstructing them afterwards. The broader pattern of federal and state divergence is discussed in California Conformity & Nonconformity 2026.
This article describes the structure of the state review. It does not determine any California adjustment amount or state the correct column or line entry for a particular return, which depends on the taxpayer’s own facts and the Schedule CA instructions for the year.
5. Distributions and the Additional Tax
A distribution not used for qualified medical expenses is included in income and, as Publication 969 puts it, “There is an additional 20% tax on the part of your distributions not used for qualified medical expenses.” That additional tax does not apply to distributions made after the account holder becomes disabled, reaches age 65 or dies.
Deemed distributions follow the same treatment. Amounts arising from a prohibited transaction, or from using the account as security for a loan, are taxable and subject to the additional tax even though no ordinary withdrawal occurred.
Because Form 1099-SA reports the amount distributed rather than its purpose, the substantiation lives with the account holder. A file that connects each distribution to the expense it paid is what supports the qualified characterisation, and that file is also what a later enquiry would ask for. Where correspondence does arrive, the general approach appears in Understanding IRS Notices 2026, and the timing of any resulting balance is discussed in Quarterly Estimated Taxes 2026.
Compliance Resources and Tools
- Internal Revenue Service — Publication 969 (2025), Health Savings Accounts and Other Tax-Favored Health Plans (accessed November 4, 2026).
- Internal Revenue Service — About Form 8889, Health Savings Accounts (HSAs) (accessed November 4, 2026).
- California Franchise Tax Board — 2025 Schedule CA (540), California Adjustments — Residents (accessed November 4, 2026).
- California Franchise Tax Board — 2025 Schedule CA (540) Instructions (accessed November 4, 2026).
- HSA eligibility is tested monthly, and the last-month rule starts a testing period that can reverse a deduction.
- For 2025 the contribution limits were $4,300 self-only and $8,550 family, plus $1,000 at age 55 or older.
- Form 8889 is required whenever there was HSA activity, including a year in which only an employer contributed.
- California does not follow the federal treatment, and the deduction appears on Schedule CA (540), Section C, line 13.
- Non-qualified distributions are included in income and carry an additional 20% tax, with stated exceptions.
References
- Internal Revenue Service. Publication 969 (2025), Health Savings Accounts and Other Tax-Favored Health Plans. irs.gov/publications/p969 (accessed November 4, 2026).
- California Franchise Tax Board. 2025 Schedule CA (540), California Adjustments — Residents. ftb.ca.gov (accessed November 4, 2026).
The information contained in this publication is provided for educational and general informational purposes only. It does not constitute tax advice, accounting advice, legal advice, or any other form of professional advice and does not create a client-professional relationship.
The content reflects tax law and regulations applicable on the date of publication only and is subject to change without notice. Examples and illustrations are hypothetical and do not represent any specific taxpayer situation. Past results or referenced positions do not guarantee future outcomes.
No reader should act or refrain from acting on the basis of this publication without first obtaining specific written advice from a licensed CPA based on the reader’s individual facts and circumstances.
Any federal tax advice contained herein is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
Written by Parsi Team. Approved by Parsi Team. All other limitations stated in the disclaimer above remain fully applicable.