"They said I can simply transfer the $800 contribution back as a personal contribution "
I am not sure what they mean by this. Are they saying that they will accept your payment of $800 as a personal contribution? That doesn't do you any favors.
This puts your HSA balance (less any amounts taken out for medical expenses) at $2,000, right? Because of the last-month rule, you won't have an excess contribution on your 2021 tax return.
But, as you know, you will fail to maintain HDHP coverage in 2022 (since you have already gone off it). After the calculation, TurboTax will add $800 to Other Income (the amount that you would not have been able to contribute had it not been for the last month rule), and penalize 10% ($80) to boot.
Now, for another alternative. You are permitted to withdraw money from your HSA in order to reimburse yourself for any qualified medical expenses that you have not otherwise been reimbursed for. So if, for example, you can add up $800 for unreimbursed medical expenses that were incurred AFTER your HSA was created, then you would draw up this list and keep it in your tax files. If you ever got audited, and the IRS agent noticed that your records don't match those of the HSA custodian (so that $800 is a taxable distribution), you could pull out that list and say, I withdrew it to pay for these unreimbursed expenses that were incurred after the creation of the HSA. Since you would be allowed to do that, the agent would let it go.
As for Qualified Medical Expenses, the IRS in Pub 969 says:
"Qualified medical expenses are those expenses that would generally qualify for the medical and dental expenses deduction. These are explained in Pub. 502, Medical and Dental Expenses."
However, there have been some updates:
"Amounts paid after 2019 for over-the-counter medicine (whether or not prescribed) and menstrual care products are considered medical care and are considered a covered expense." This adds a fair amount that previously would not have counted.
Also,
"Insurance premiums. You can’t treat insurance premiums as qualified medical expenses unless the premiums are for any of the following. 1. Long-term care insurance. 2. Health care continuation coverage (such as coverage under COBRA). 3. Health care coverage while receiving unemployment compensation under federal or state law. 4. Medicare and other health care coverage if you were 65 or older (other than premiums for a Medicare supplemental policy, such as Medigap).
The premiums for long-term care insurance (item (1)) that you can treat as qualified medical expenses are subject to limits based on age and are adjusted annually. See Limit on long-term care premiums you can deduct in the Instructions for Schedule A (Form 1040). Items (2) and (3) can be for your spouse or a dependent meeting the requirement for that type of coverage. For item (4), if you, the account beneficiary, aren’t 65 or older, Medicare premiums for coverage of your spouse or a dependent (who is 65 or older) aren’t generally qualified medical expenses."
For many people, the long-term care insurance premiums alone can be substantial. Of course, COBRA and health insurance while on unemployment are also expensive and would likely reach $800 without a lot of effort.
How does this add up?
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