So firstly, you should call the HSA bank back and see if they will accept a “return of mistaken distribution”. Use that exact terminology. If they accept the return, they will issue a corrected 1099-SA, and you will report the net amount as your withdrawal. You don’t need to wait for the corrected 1099 to file your tax return.
If they don’t accept a return, then since the reimbursement was paid to you in 2022, you don’t actually have a problem for 2021. Your expenses were legitimate at the time. Report on your 2021 tax return that you used all of the distribution for qualified expenses.
Then, if you have additional medical expenses in 2022, you can count the reimbursement as being used toward those expenses. If you don’t have medical expenses in 2022, you would report the uncovered distribution as a “taxable recovery”. This is a technical term for a reimbursement of a previous tax deduction, and it is contained in the “other uncommon income” section of TurboTax.
For example, if you had $1000 of medical expenses in 2022, you would report $2900 as a taxable recovery. This is income on your 2022 return, not 2021, because the reimbursement was paid to you in 2022.
2022 might be a good year to catch up on any minor medical expenses that you have been putting off, such as routine eye exams, new eyeglasses, or get your kids started on the braces that they will eventually need.
Additionally and completely unrelated to income tax, I would also contact whatever local news channel has a “news on your side“ segment. I work adjacent to the hospital industry and I have never encountered a billing person coming into the patient’s room and demanding payment while the patient is there, under care, and in such a stressful situation. I have been asked to pay an estimated balance before a procedure when it was scheduled in advance, and I have been billed after a procedure, but I have never been approach for money in the middle of a hospitalization. That seems unethical and coercive. And it seems like something that a news organization looking for story content might want to chase down. The hospital at least needs to be embarrassed over this.
