BillM223
Expert Alumni

Deductions & credits

As Opus has indicated, the correct procedure would be for your HSA custodian(s) to accept your request to consider the 3,900 (or 3,740 or whatever) to be a mistaken distribution. If they would accept your request, then you would have to come up with the 3,900 and pay them back - I imagine that this might be difficult in your current circumstances.

 

But please see this:

"

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 18 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.

See "HSA Mistaken Distributions" in the 1099-SA instructions.

 

Note that you have until April 18, 2022 to report a mistaken distribution, so like Opus, I do not understand what their excuse is for not considering your request.

 

However, just below that, the instructions add:

"As the trustee or custodian, you do not have to allow beneficiaries to return a mistaken distribution to the HSA. However, if you do allow the return of the mistaken distribution, you may rely on the account beneficiary's statement that the distribution was in fact a mistake."

 

So the HSA custodian(s) could dig in their heels and refuse to change the paper work and you literally can't do anything about, even though you were obviously not at fault. This is why I encourage taxpayers in your situation to grovel if they have to to get the HSA custodian to change their paperwork to show that the return of the 3,900 was a refund and not a contribution. After all, it's just some paperwork on their part, but it will be a big deal for you.

 

Be sure to point out the April 18, 2022 date, because they may think they can't accept a mistaken distribution request across the end of a calendar year, but they can.

 

On the 1099-SA that you have (will?) receive, I would just report that all of the distribution of 6,000 was spent on qualified medical expenses - this has the advantage of being true. The problem is that the HSA custodian has on their books that you had this 3,900 contribution in 2022 which you didn't make. 

 

For tax year 2022, your W-2 will report your HSA contributions, and when you make your entries into TurboTax, TurboTax is not going to be aware of that 3,900 (1099-SA distributions and HSA contributions don't affect one another). So, so long as you don't tell TurboTax about this 3,900 contribution in 2022, your 2022 return should be fine. 

 

The problem is that the paperwork at the HSA custodian will be out of whack with what actually happened and this difference will appear on the 5498-SA. Fortunately, you don't enter anything from the 5498-SA on your return.

 

But if you are ever audited, then if the auditor looks at your returns and the 5498-SAs and the custodians' records, then they will be inconsistent. At that point, I would hire an Enrolled Agent or CPA or maybe even a tax attorney (if you can get one for cheap) to represent you in the audit. And if you are never audited, then no harm done - you are not out any money and you did the right thing as best you could.

 

The IRS needs to address this relatively common issue of taxpayers getting refunds from doctors and hospitals which end up going straight back to the HSA and getting reported as a contribution.

 

@Opus 17

 

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