HSA reimbursement for dependent

[bwlawson-jr]

My daughter was my dependent in 2022 and was on my insurance plan which has an HSA. In 2023, she continued on my plan.  She had $750 in medical expenses in January 2023, and I paid them from the HSA. Later that year, she moved from home and consequently does not quality to be my dependent in 2023. But at the time I paid from the HSA, she was still depending on me and was a dependent in my most recent tax return (2022).  My understanding is that I can only pay for her medical expenses if she is a dependent.  But its impossible to know sometimes if a child will be able to be decleared as a dependent until the year is over.  How should I report this in the HSA section of my federal tax return

[dmertz · Accepted solution]

You might be able to repay the distribution to the HSA if the HSA custodian will accept a "return of mistaken distribution."  However, the HSA custodian is not required to accept such a repayment.  A return of mistake distribution is not a rollover, so it is not subject to any rollover limitations.  The HSA custodian is supposed to correct the Form 1099-SA to remove the repaid amount from the gross amount reported, but few HSA custodian seem to comply with this requirement.

If you can't do a return mistaken distribution and you can't apply the amount distributed to someone else's qualified medical expenses, you'll have to report the distribution as taxable and, if you were under age 65 at the time, subject to a 20% extra tax.

[BillM223]

dmertz is correct in his comments on how to handle the distribution if your daughter is not your dependent. The "mistaken distribution" is an excellent way to handle this if your daughter turns out not to be a dependent.

However, we in the Community can't say for sure if she is a dependent or not based on what you have told us. Please see the Pub 17 section on who is a dependent (starting at the bottom of page 26). The fact that she moved out not is not sufficient to determine if she was a dependent in 2023.  Please review Table 3-1.

What is important is her age, where she was living (and for how long), did she support herself, and so on.

As for whether or not you could spend money for her medical care, the answer is a bit more complex that just being a dependent. Pub 969 (page 9) says:

Qualified medical expenses are those incurred by the following persons. 

1. You and your spouse. 

2. All dependents you claim on your tax return. 

3. Any person you could have claimed as a dependent on your return except that: 

a. The person filed a joint return;

b. The person had gross income of $4,400 or more; or 

c. You, or your spouse if filing jointly, could be claimed as a dependent on someone else’s 2022 return.

Now, you may be right that she was not qualified to benefit from this distribution but since we know so little about your situation, I have to ask.

[dmertz]

My assumption is that she did meet the residency requirement to be a dependent.