How do I reconcile this situation: My husband has accidentally used his HSA debit card for non-medical purchases.

[garycarols]

Do the retailers and/or banks send specific purchase information to the IRS?  When we fill out the Form 8889, I assume the bank will show that he has spent "X" dollars with his HSA debit card.  (Hopefully it won't show that it was at the gas station!)  May I just balance that by claiming an equal amount for "qualified medical expenses" on Form 8889?  We have plenty of medical expenses that WOULD qualify--like chiropractors, etc, that we don't otherwise deduct since we don't itemize.  Our intention was to use the HSA as an investment, and we goofed by accidentally using the HSA debit card.  In advance,  I SO appreciate your help!   

[Opus 17 · Accepted solution]

Only the total amount of HSA withdrawals is reported.  And in fact, it doesn't actually matter that the money was spent at other places, as long as you have at least as much qualified medical expenses during the year.  (A qualified medical expense is an expense that was incurred after the date the HSA was opened, and that was paid during the tax year.)

For example, you can pay your expenses with a regular credit card or from a checking account, and then reimburse yourself with a withdrawal to your own checking account.  You just need to have sufficient qualified medical expenses.

[Opus 17]

Alternatively, there is a procedure to return an unallowable withdrawal, you would need to contact the HSA bank, it usually needs a special form.

Also note that if you are not maxing out the HSA now, you can do that and still pay your expenses tax free.  For example, if your plan is to invest $2500 per year in a single HSA (maximum contribution $3400) you could deposit additional money (up to $3400) and immediately withdraw it and still get the tax benefit.  In other words, you get a bill on Monday, put the money in the HSA Tuesday, withdraw it Wednesday, and pay the doctor on Thursday for an instant tax deduction.

[dmertz]

The HSA custodian is not required to accept a return of mistaken distribution.  To be eligible for a return of mistaken distribution, the distribution technically must have been made with the belief that the distribution was to pay a qualified medical expense that later turned out not to be the case.  I think it would be difficult to convince the HSA custodian that a debit shown as coming from a gas station was thought to be for a qualified medical expense, but it might be worth trying.

Otherwise, just be sure to keep receipts showing the amount of medical expenses to which the distribution from the HSA is applied.  Qualified medical expenses can be any medical expenses incurred after the date that the HSA was established paid out of pocket for you, your spouse or your dependents, although reporting HSA distributions that were used to reimburse yourself for expenses incurred in an earlier year can be awkward in TurboTax.

[meandmine9]

Taking this to a whole new level, I have a situation where my HSA card was misused on multiple occasions.  I deposited money back into my HSA account to offset this thinking it would all work out in the end.  Not so.  I now have two issues.  The Gross distribution in Box 1 of my 1099-SA includes all distributions (even the erroneous ones), and I have now exceeded the maximum allowable contribution.  I accounted for both the non-medical purchases and additional contributions in TurboTax, but I am getting taxed on both since my 'reimbursement' is seen as an excessive contribution.  Any thoughts on how to clear this up?

[BillM223]

@meandmine9

"The Gross distribution in Box 1 of my 1099-SA includes all distributions (even the erroneous ones)," - this is correct. However, read the dmertz answer just above your post. If you have paid any medical expenses that were not reimbursed by insurance since you began your HSA, you can apply the misdirected money to those expenses, since you are allowed to reimburse yourself for such things from the HSA.

Be sure to document both the distribution ("bad" use of the card) and the expenses they apply to and stick it in your tax file in case you are ever asked.

Otherwise, as you have seen, distributions for amounts that were not for qualified medical expenses are not only subject to federal income tax bit receive a 20% penalty...so you are motivated to find those expenses that I just referred to.

Alternatively, you can ask the HSA administrator to treat each of those "bad" expenses as a mistaken distribution, but as dmertz notes, your HSA custodian does not have to accept it - call them and ask. (If they do accept it, then you have to pay it back, which may be a whole new problem for your cash flow.

Yes, you probably have made excess contributions. You can either withdraw them (if you can), or carry them over to next year with a 6% penalty. NOTE: any amount carried over reduces your HSA contribution limit for next year, so watch your contributions! P.S. your HSA custodian will not know this (it's your tax return, not theirs), so you have to limit your contributions yourself.