HSA Mistaken Distribution

[Jon777]

I have a HDHP with HSA for my family and have had this for 2018, 2019, and 2020. My 23 year old son is on my plan but is not a tax dependent. I assumed he could use my HSA because he was under 26 and permitted to be on my HDHP.  He used it for 2018 to 2020 and I have recently learned he is not eligible due to not being a tax dependent in the 3 years.  My HSA custodian said for 2019 and 2020 I can send back those funds with a "Mistaken Funds Form" but the deadline is passed for 2018.  Is my best approach to amend my 2018 tax return or is there an alternative option?  I do have enough other qualified expenses from 2018 that were never paid with my HSA and could "offset" my son's ineligible expenses from 2018 but I'm not sure if the IRS would accept this if I'm audited.  Please let me know the best approach.  Thanks, Jon.

[tangrnand4]

I have almost the exact same problem. We discovered recently that even though our son is still on our health plan, he is no longer our dependent. So we asked our HSA bank if we can return the 2019 funds with a mistaken distribution form and get a corrected 1099. We did, but now they say they can't correct the 1099. And that our mistaken distribution that we returned will show up on our 2020 1099. I am still a bit in the dark about how I fill out our 2019 taxes because of this.

[Opus 17]

First of all, you can use HSA funds to pay for expenses for yourself, a spouse, a dependent, or a person who could be a dependent if the only thing that disqualifies them is having income more than $4200, or the fact that they filed a joint return with a spouse.

In the case of a child who does not qualify as a dependent because they are 19 or older and not a full time student, or age 23 or older, you can still claim them as a dependent if you provided more than half their total financial support AND their income is less than $4200.  Since the income test does not apply to spending HSA funds on their care, the only real test (most of the time) is did you pay more than half their support?  Support includes a share of the rental value of your home if they live with you, including a share of food, utilities, property taxes and repairs; as well as direct financial support including tuition payments, tuition you pay for with loans in your name, money for clothing, travel and medical expenses, and of course, part of the medical insurance premiums.

Are you still convinced the child does not qualify for you to pay their medical expenses from the HSA?

[Opus 17]

---

@tangrnand4 wrote:

I have almost the exact same problem. We discovered recently that even though our son is still on our health plan, he is no longer our dependent. So we asked our HSA bank if we can return the 2019 funds with a mistaken distribution form and get a corrected 1099. We did, but now they say they can't correct the 1099. And that our mistaken distribution that we returned will show up on our 2020 1099. I am still a bit in the dark about how I fill out our 2019 taxes because of this.

---

The plan trustee is not required to accept a return of mistaken contributions.  However, if they do accept a return of mistaken contributions (which must be made by the tax deadline of the next year; normally April 15 but July 15 this year), they must also issue a corrected 1099-SA.  See the instructions for form 1099-SA.

https://www.irs.gov/instructions/i1099sa#idm139635141519168

If they refuse, I would file your tax return using the corrected distribution amount.  When the IRS sends you a mismatch letter (and they will) send them a letter of explanation including copies of your correspondence with the HSA trustee.  If you have only been talking on the phone, send a letter to the HSA trustee by certified mail, explaining your situation and reference the 1099-SA instructions that if they accept a return of mistaken contributions, they must also correct the 1099-SA.  Keep copies of all correspondence to send to the IRS. 

[Opus 17]

---

@Jon777 wrote:

I have a HDHP with HSA for my family and have had this for 2018, 2019, and 2020. My 23 year old son is on my plan but is not a tax dependent. I assumed he could use my HSA because he was under 26 and permitted to be on my HDHP.  He used it for 2018 to 2020 and I have recently learned he is not eligible due to not being a tax dependent in the 3 years.  My HSA custodian said for 2019 and 2020 I can send back those funds with a "Mistaken Funds Form" but the deadline is passed for 2018.  Is my best approach to amend my 2018 tax return or is there an alternative option?  I do have enough other qualified expenses from 2018 that were never paid with my HSA and could "offset" my son's ineligible expenses from 2018 but I'm not sure if the IRS would accept this if I'm audited.  Please let me know the best approach.  Thanks, Jon.

---

All you need to show if audited is that your qualifying medical expenses for the year were equal to or more than the amount you withdrew from the HSA.  You do not have to do one-for-one matching between expenses and withdrawals.