HSA and Refunded medical expenses

[bbdo12]

I have a strange situation. Last year, I realized late in the year that our health insurance company wasn't processing our pharmacy claims correctly and we were being charged full price even though we had met our deductible for the year. After several conversations and an audit on their end, they are reimbursing us a lot of money. We had paid for all of these pharmacy claims out of our HSA account, but we are actually getting refunded more than what we actually paid. We have discount cards on two of our meds, but the insurance  company doesn't see those payments. For instance, if a med is $1500 and the discount card covered $500, we paid $1000. But the insurance company is refunding us the full $1500. Can all of the money received from the insurance company go back into out HSA as long as the total received doesn't exceed the total withdrawn for that given tax year? Or, do we really need to go back to the pharmacy companies who provided the discount cards and refund them the portion that they paid? This whole process has been soooo exhausting.

[BillM223]

"For instance, if a med is $1500 and the discount card covered $500, we paid $1000. But the insurance company is refunding us the full $1500"

Yes, this is a funny thing, that the "coupon" (similar to what you call a discount card) is between the pharmacy and the drug supplier, not involving the insurance company. However, this begs the question: "How did the insurance company know that the list price was $1,500? They obviously did not check what they actually paid for the drug on your behalf.

"Can all of the money received from the insurance company go back into our HSA as long as the total received doesn't exceed the total withdrawn for that given tax year?"

No.

The way this should work is this:

Any amount that was distributed from your HSA for something that turns out was not for a qualified medical expense is considered a "mistaken distribution". So the $1,000 (to use your example) is a mistaken distribution (expand for as many payments you have in this situation).

If you determine that you had $5,000 (to pick a number) of HSA payments that actually should never been paid because your insurance should have covered it, then you contact your HSA custodian and report that you had $5,000 in mistaken distributions, and that you would like to return them. If the custodian accepts this request (they don't have to, so be nice and explain how this was not of your doing), you will have to fill out a form for the custodian and write them a check for that amount. The custodian will then send you a corrected 1099-SA to reflect the change.

This will make the HSA paperwork correct which is what the IRS cares about.

If I got your story right, the insurance company overpaid you. Rightfully, this difference belongs to the insurance company, so you ought to send the difference back to them ($500 in the case you posted above). I don't think you need to involve the discount company because I don't think they put any money into this deal (I think they just negotiated a discount for their card holders), and if they did, I don't know if they would ever figure it out.

I leave it to you to decide if you will be able to convince the insurance company to take the overpayment back, or just report the difference (the $500) as miscellaneous income. In any case, it does not belong in your HSA unless you want to make a contribution that is still under your annual contribution limit.

Make sense?