How do I report a refund to my HSA credited directly to my account?

[JP1979]

We have an HSA that we pretty much tapped out in 2018 so we stopped using it. Then in Feb 2019, we received a $1500 refund directly deposited back into the HSA account from the medical provider. We've been using the funds from that refund for new medical expenses throughout 2019. My question is, do we need to report the $1500 as an HSA contribution for 2019? And how would we do that?

[BillM223]

No, the $1,500 is not considered a contribution for your HSA. You already got the tax benefit when you contributed the $1,500 the first time; you cannot double-dip.

You need to report to your HSA custodian the original $1,500 pay out as a "mistaken distribution" (that is, you should not take money out that is going to be reimbursed by insurance - yes, I realize that you did not know this at the time).

1. Contact your HSA administrator and tell them that you had a mistaken distribution (use that phrase). You may be able to report this through their website (go look).

2. Complete the mistaken distribution form and send it to the HSA administrator.

3. Also send the HSA administrator a check for the amount of the mistaken distribution.

The HSA administrator should send you a corrected 1099-SA to account for this "distribution".

Note: the HSA administrator does NOT have to accept your application for a mistaken distribution, so be nice (let them know that you have no reason to expect this refund). This is what the IRS says:

"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. .... Do not report the mistaken distribution on Form 1099-SA. Correct any filed Form 1099-SA with the IRS and the account beneficiary as soon as you become aware of the error." See the 1099-SA instructions.

[JP1979]

Thanks for the quick reply. I'm curious as to why I would need to send them a check for $1500 when the refund was directly credited back to my HSA. We have an HSA debit card that we've used to spend much of that $1500 on qualified medical expenses this year. When I first contacted the HSA admins about the refund earlier this year, they told me we could continue to spend it on qualified medical expenses. Your suggestion sounds as if I have to pay $1500 out of pocket to correct their error.

[BillM223 · Accepted solution]

The error is on the part of the insurance company and/or the HSA custodian.

The problem is that the IRS does not consider a distribution that is reimbursed by the insurance company to be a qualified medical expense. You can spend HSA money only on unreimbursed medical expenses.

The real problem is the paperwork, in case you are ever audited.

The only way this works without declaring it a mistaken distribution is for the HSA to update their paperwork to consider the $1,500 refund to be an HSA contribution from you in 2019. This can work because the refund came in 2019 and you spent the $1,500 in 2019.

However, this means that you have to add a “personal” contribution to your HSA in 2019 to your tax return. You would do this on the “Let’s enter [name]’s HSA contributions” screen in the HSA interview on the second line (“personal” contributions).

Note that this may cause you to have excess HSA contributions in 2019 (I don’t know what else you have contributed). If not and the HSA custodian agrees to do this, then you can keep the 1099-SA that you got as well as your $1,500 check I was going to make you write. And the custodian’s paperwork should be up-to-date as well as match your tax return in case of an audit.

But if the HSA custodian has not already reported in its paperwork that the refund was a contribution from you to your HSA (actually, a contribution could be from practically anyone, so long as you account for it on your tax return), then your paperwork and their paperwork is out of whack.

The insurance company (or the HSA) should have sent the money to you, not to your HSA. The effect of what happened (you spending the refund) is to give you an extra $1,500 of tax benefit (tax-free payments for medical expenses) that you never contributed but you spent.

Consider (this is an example):

• You contribute $2,000 to the HSA in 2018 and report this to the IRS (well, your employer does)
• You spend the $2,000 in 2018 on qualified medical expenses and you report this to the IRS (through form 8889)
• In 2019 your HSA receives a refund of $1,500
• You spend the $1,500 on qualified medical expenses in 2019, and report this to the IRS on your 8889
• You reduce your HSA value to zero.

Look, in this example you only reported $2,000 of contributions to the HSA, but you reported to the IRS through form 8889 that you spent $3,500 out of it. Since the IRS limits the amount of contributions to your HSA on an annual basis, they are going to wonder why you (or your employer) didn’t report this $1,500 contribution to them.

So contact the HSA custodian and see if they will agree to do this (you will probably have to go beyond any customer service rep and speak to the accountant who is setting up their HSA policies and procedures).

Otherwise, you may have to go to the mistaken distribution route.

Let me know.