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Does a non-taxable payout from supplemental accident insurance have any impact on HSA funds used to pay for the medical expenses from an accident?

I have supplemental accident insurance.  This is paid for through a post tax deduction from my pay check.  I pay the full cost of the supplemental accident insurance with post tax dollars.  This supplemental accident insurance is optional and has nothing to do with my medical insurance.  My understanding is that any pay outs from this supplemental insurance are therefore not taxable.  Per the provider of the supplemental accident insurance, the pay outs can be used for any purpose including household bills.  I get injured in a household accident.  I go to the urgent care and receive medical treatment.  I pay the urgent care with funds from my HSA account.  I file a claim with my supplemental accident insurance and they pay me a few hundred dollars (less than the medical bills).  Does a pay out from the supplemental accident insurance have any impact on what should be reported as distributions for qualified medical expenses that were paid by the HSA account?

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Does a non-taxable payout from supplemental accident insurance have any impact on HSA funds used to pay for the medical expenses from an accident?

Yes, the HSA is supposed to pay for medical bills that don't get reimbursed.

There are a couple of ways to approach this.

1. Ask your HSA plan administrator to treat the amount reimbursed as a "mistaken distribution". In this case, you will send them the money that insurance covered and they will issue you (eventually) a corrected 1099-SA. Note that the plan administrator is not required to honor your request.

2. An easier way to approach this is for you to use the insurance money to pay medical bills for a while instead of using your HSA until the insurance reimbursement is exhausted. Since the insurance money is also tax-free, this is the same effect as using the HSA, without the paperwork.

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