1. You do not lose the HSA because you are on Medicare, you lose only the ability to contribute to the HSA any longer. You can continue to take money from the HSA to pay for qualified medical expenses until the HSA's funds are exhausted.
2. The laws under which "dormant" accounts can be seized and turned over to the state vary wildly from state to state and even from type of account to type of account. The one thing they have in common is that the bank or financial institution was required to contact you prior to the seizure of the account, to give you the chance to indicate that the account was not dormant.
3. In your case, I would try the following:
3.a Contact the state to get your money back.
3.b Contact your HSA administrator to see if they will process the seizure as a "mistaken distribution". If you can show some activity (like paying for items or just logging into the online account - you can even state that you are at the same address and did not receive any notice), then the HSA administrator should not have turned your funds over to the state.
3.c If the HSA administrator will honor the "Mistaken Distribution" protocol, then they will ask you to send them a check for the distribution amount - which you are in the process of getting (see step #3.a)
3.d Get a new HSA administrator. Ask prospective administrators how they handle inactive accounts so that this does not happen again. When you find a good one, you can ask the first HSA administrator to transfer trustee-to-trustee the amount in the HSA to the new one. Remember that you own the HSA and can move it to any agreeable HSA bank or financial institution.
Do all this before April 17 2018.
