Hello, If I make a non-qualified withdrawal from my HSA am I able to return the funds to the account before the end of the year to avoid paying the taxes and penalty?

[SweetieJean]

I doubt it, since doing so would essentially let you take free "loans" from the account any time you wanted.

[SweetieJean]

See below, as it depends upon the actual facts.  Normally, you must notify the administrator as soon as the mistake is discovered. Paying for a knowingly non-qualified expense is not a Mistaken Distribution. For example, using a debit card or HSA checking account for groceries or other personal expenses is not a Mistaken Distribution.

[SweetieJean · Accepted solution]

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.

It'ss up to the HSA administrator to accept your stated reason that the distribution was a mistake and to allow a return of mistaken distribution.

[dmertz]

You can also return the money as an HSA rollover contribution if done by the 60th day following the date of the distribution, regardless of the reason for the distribution, provided you have not rolled over any other HSA distributions made within the year ending on the date of the distribution to be rolled over.

[SweetieJean]

@dmertz Can you clarify? Pub 969 says this:
"You can roll over amounts from Archer MSAs and OTHER HSAs into an HSA."

[dmertz]

Are you concerned about the word "other?"  Section 223(f)(5)(A) simply refers to a rollover to "a health savings account" without any distinction between the HSA from which the distribution was made and any other HSA.  Just like an IRA, there is no tax-code restriction against rolling a distribution back into the same HSA.  A particular HSA custodian's HSA agreement might prohibit the HSA from accepting rollovers (which would be highly unusual),  but that would prohibit that HSA from accepting any rollover, not just the rollover of distributions made from the same HSA.  Even if there was tax-code restriction on rolling back to the same HSA, nothing would prevent one from opening a different HSA and completing the rollover (which is why it makes no sense to have such a restriction).

Also note that Pub 969 saying "other HSAs" makes no statement regarding the same HSA.  Just because you are permitted to roll over from other HSA, doesn't mean that you are not permitted to roll over from the same HSA.

[SweetieJean]

"A rollover is a tax-free distribution
(withdrawal) of assets from one HSA or
Archer MSA that is reinvested in
ANOTHER [emphasis added] HSA of the same account
beneficiary. Generally, you must
complete the rollover within 60 days
after you received the distribution"
<a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/i8889.pdf">https://www.irs.gov/pub/irs-pdf/i8889.pdf</a>

[SweetieJean]

Am I being too literal?

[dmertz]

Yes.  You are inferring that a rollover being permitted to another HSA somehow means that a rollover to the same HSA is prohibited, but such an inference is faulty and improper.

[dmertz]

Of course if the custodian will accept a return of mistaken distribution, that's always going to be better (as long as there was indeed reasonable cause to treat it as a mistaken distribution and it is not a fraudulent return of mistaken distribution) since it avoids anything to do with the one-rollover-per-year rule.