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Goldens4us
New Member

I received a refund for a 2016 HSA distribution. I believe I can't return it to the HSA since it is now Sept 2017. Should I reduce my qualified expenses in an amended return?

 
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dmertz
Level 15

I received a refund for a 2016 HSA distribution. I believe I can't return it to the HSA since it is now Sept 2017. Should I reduce my qualified expenses in an amended return?

If you did not receive the medical-expense refund until 2017, the deadline for its return to the HSA is April 15, 2018.  Assuming that the deadline is met, if the HSA custodian will accept the return to your HSA account of the mistaken distribution, you can still do so and there will be no need to amend your 2016 tax return.  If you received the refund in 2016 and were able to be aware of the refund in 2016, the deadline was April 15, 2017 and the deadline has passed.

If you do not meet the deadline, perhaps because the HSA custodian will not accept the return of the mistaken distribution, you'll have to amend your 2016 tax return to reduce the amount of qualified medical expenses shown on Form 8889 line 15 unless there is some other qualified medical expense, incurred anytime after your HSA account was established, to which you can apply the distribution.  In case the IRS ever questions your use of HSA funds, you'll want to keep your records of qualified medical expenses to substantiate that your HSA distributions were used for such expenses.

Here is the guidance from IRS Notice 2004-50 (note that this was written before the early-distribution penalty was increased from 10% to 20% for 2011 and beyond):

Q-37. An account beneficiary receives an HSA distribution as the result of a mistake of fact due to reasonable cause (e.g., the account beneficiary reasonably, but mistakenly, believed that an expense was a qualified medical expense and was reimbursed for that expense from the HSA). The account beneficiary then repays the mistaken distribution to the HSA. Is the mistaken distribution included in gross income under section 223(f)(2) and subject to the 10 percent additional tax under section 223(f)(4) or subject to the excise tax on excess contributions under section 4973(a)(5)?

A-37. If there is clear and convincing evidence that amounts were distributed from an HSA because of a mistake of fact due to reasonable cause, the account beneficiary may repay the mistaken distribution no later than April 15 following the first year the account beneficiary knew or should have known the distribution was a mistake. Under these circumstances, the distribution is not included in gross income under section 223(f)(2), or subject to the 10 percent additional tax under section 223(f)(4), and the repayment is not subject to the excise tax on excess contributions under section 4973(a)(5). But see Q&A 76 on the trustee’s or custodian’s obligation to accept a return of mistaken distributions.

Q-76.  Must the trustee or custodian allow account beneficiaries to return mistaken distributions to the HSA?

A-76.  No, this is optional.  If the HSA trust or custodial agreement allows the return of mistaken distributions as described in Q&A 37, the trustee or custodian may rely on the account beneficiary’s representation that the distribution was, in fact, a mistake.

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