The practical answer
Box 3 identifies the custodian’s distribution category. Read the code together with the account type, gross distribution, any excess-contribution earnings, and the underlying event. A code 1 normal distribution does not certify qualified medical use.
A distribution code is a useful starting label, but it is not a complete tax conclusion. Different events can require different supporting documents even when the gross amount is clear.
This guide explains the issuer’s code list and a practical review process. For a death, disability, prohibited transaction, or disputed classification, preserve the records needed for the applicable return review rather than choosing a replacement code yourself.
Read the code with the rest of the statement
Start with the owner or recipient, custodian, account reference, calendar year, corrected status, and account-type checkbox. Form 1099-SA covers HSAs, Archer MSAs, and Medicare Advantage MSAs. Confirm which account is involved before applying HSA-specific guidance.
Record box 1 gross distributions, box 2 earnings on excess contributions, box 3 code, and any box 4 fair market value. These fields can describe related aspects of one event. In particular, the instructions include box 2 earnings within box 1 rather than treating them as an extra distribution to add again.
Use the specific Form 1099-SA instructions for the actual form year. The currently posted instructions are revision December 2026 and identify their use for 2026 information furnished in 2027.
Use the IRS definitions to identify the review path
| Code | IRS category, paraphrased | Useful review evidence |
|---|---|---|
| 1 | Normal distributions, including ordinary payments to the holder or directly to a provider when another code does not apply. | Withdrawal ledger and expense records. |
| 2 | Distributions of excess contributions. | Custodian excess-removal calculation and earnings detail. |
| 3 | Distributions after the account holder became disabled under the referenced rule. | Event and issuer-classification records for review. |
| 4 | Specified death payments to an estate; not used with code 6. | Recipient, death date, payment year, and estate documentation. |
| 5 | Prohibited transaction. | Custodian explanation and the transaction requiring tax review. |
| 6 | Post-year-of-death distributions to a nonspouse beneficiary other than an estate; not used with code 4. | Beneficiary identity, death year, and payment timing. |
The table is a review index. Read the full distribution-code and death-of-account-holder instructions before applying a special-event rule.
Worked example: ordinary withdrawals and an excess return
Fictional example: A custodian reports $800 of ordinary distributions under code 1 on one record. A separate code 2 record reports $315 in box 1, including $15 of earnings shown in box 2, for a documented return of excess contributions.
The gross distribution comparison is $800 + $315 = $1,115. Adding the $15 again would produce $1,130 and count the same earnings twice. The ordinary distribution’s receipt review and the excess-return documentation should remain separate.
The example does not determine the taxable amount or any additional tax. The custodian’s statement, removal calculation, contribution history, and applicable return instructions are needed to evaluate the excess transaction. The code 1 record still requires evidence of how the $800 was used.
Do not read normal as a certification of medical eligibility
A code 1 record tells you that the issuer used the normal-distribution category. The gross-distribution instructions state that the trustee is not required to determine the taxable amount. A matching code and withdrawal amount therefore cannot replace the account holder’s evidence.
Publication 969 (2025) requires records supporting qualified medical use, the absence of other reimbursement, and the absence of an itemized deduction for the same expense. Keep the itemized receipt, payment evidence, and allocation to the withdrawal.
Likewise, do not treat an unfamiliar special code as proof the custodian made an error. Identify the event and ask for its reporting explanation before requesting a correction.
Prepare a focused issuer question
Provide the form year, account reference, code, gross amount, and the relevant transaction dates. Ask which transaction or event supports the code and whether the statement reflects the custodian’s current records.
For an excess-contribution return, request the principal and earnings detail. For a beneficiary distribution, identify the relevant death year, payment year, and recipient category in the review packet. Send sensitive supporting information only through the issuer’s approved process.
If the issuer confirms an error, retain its corrected statement and mark the original superseded. Do not edit the PDF code yourself or treat an unanswered support request as authorization to substitute a different category.
Record what is resolved and what still needs tax review
Close the financial comparison separately from the classification review. You may be able to trace every dollar while still needing a custodian explanation of a special code. Keep that open item explicit.
Provide the current form, original version if corrected, transaction detail, issuer explanation, and related evidence for the return review. Publication 969 discusses Form 8889 for HSA activity and the treatment of special situations.
A useful final note states the issuer-confirmed category, supporting event, and unresolved consequence. It does not claim that a distribution is tax-free simply because the paperwork is complete.
Read the code as an investigation starting point
Read the workflow as text
- Match the statement. Confirm recipient, account type, calendar year, and current version.
- Read the category. Use the official code definition with the other reported boxes.
- Trace the event. Connect the classification to withdrawals and supporting event records.
- Resolve and review. Obtain issuer explanations, then evaluate the applicable return treatment.
Put this guide to work
1099-SA code and issuer-question matrix
Save the editable text worksheet and use it with your own records. Keep completed copies in your secure working files.
Download the worksheet TXTCommon questions
Does code 1 mean the distribution was tax-free?
No. It is the normal-distribution reporting category. Keep the evidence needed to determine qualified medical use and the applicable tax treatment.
What does code 2 identify?
The current instructions use it for distributions of excess HSA or Archer MSA contributions. Review the custodian’s removal and earnings records.
Are earnings in box 2 separate from the gross amount?
They are separately identified but included in box 1 under the instructions. Do not add them again to the gross distribution total.
Can I change a code I disagree with?
Ask the issuer to investigate and correct its statement if needed. Preserve its response and use the actual facts for the separate return review.
Why do death distributions have different codes?
The reporting depends on the recipient category and timing, among other rules. Review the full IRS instructions and supporting event documents instead of treating all death-related payments identically.
Official sources and scope
Sources checked September 5, 2026. Use the edition for the tax year and filing method you are working with; later instructions may change thresholds, fields, or procedures.
- Instructions for Forms 1099-SA and 5498-SA, revision December 2026
Current posted instructions for 2026 information furnished in 2027. Distribution boxes, codes, transfers, excess contributions and mistaken distributions.
- Publication 969 (2025), Health Savings Accounts and Other Tax-Favored Health Plans
HSA distribution evidence, qualified-expense recordkeeping, establishment dates, double reimbursement restrictions and Form 8889. Use the applicable return-year edition.
- About Form 1099-SA
Official form purpose, current form and instructions, and prior revisions.