@sandeep_challa wrote:
Thank you very much for the reply. So repaying the entire amount before the end of the year will not help me save taxes and penalties if applicable. Is that correct?
The answer is "maybe."
You may be thinking of an IRA, where you can return a distribution within 60 days and it doesn't count as a distribution. (Sometimes longer than 60 days in certain exceptional circumstances.)
There is no such provision for an HSA. However, you can sometimes perform a "return of mistaken distribution" which has the same effect. This is what the IRS says:
HSA mistaken distributions.
If amounts were distributed during the year 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. For example, 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.
Note that account trustees are not required to accept a return of mistaken distribution. You would need to check first with your plan administrator to see if this is allowed. It's not a regular contribution, it would require you fill out a special form on which you must certify that the original distribution was "because of a mistake of fact due to reasonable cause."
You seem to want to borrow this money for non-medical purposes and put it back. That's not what an HSA is for and is not a "mistake of fact due to reasonable cause" so you would be lying on the form when you try to return the "mistaken" contribution. If audited, you would be exposed to the original tax and penalty, plus additional penalties for knowingly filing false documents. Most people are not audited. Only you can determine the level of risk you want to expose yourself to on your tax return.
