If I receive a refund from a medical provider paid through an HSA account, is it necessary to deposit back into my HSA account? Does the IRS know I received a refund?

[Opus 17]

The IRS does not know (unless you get unlucky enough to be audited) but the legal thing to do is 

(a) to put it back or 

(b) report it as taxable income or 

(c) use the money for a future medical expense (still in 2016) and then not request reimbursement for that expense.  As long as your total qualified expenses for the year are equal or more than your qualified withdrawals plus the amount of the refund, then the refund doesn't matter.  

Note that if you want to put the money back in the account, you will need to contact the HSA administrator and tell them in advance that this is a return of a previous withdrawal.  There may be a special form to send with the check.  Otherwise, sending them a check will look like a new tax-deductible contribution.

If you decide to keep the money and report it as taxable income, it is in the very bottom section of miscellaneous income under "reimbursement (or recovery) of a previous deduction".

[dmertz]

If practical, the simplest alternative is (c), above, since it does not require any involvement of the HSA custodian (as does (a)) and does not incur any tax or potential 20% early-distribution penalty (as does (b)).

Note that an HSA custodian is not *required* to accept a return of mistaken distribution, although most do.  The deadline is April 15 of the year following the year of distribution, however, since the HSA custodian has the option not to accept a return of mistaken distribution, you are probably better off returning the mistaken distribution before the end of the year.  If the return of mistaken distribution is made and accepted after the custodian prepares the original Form 1099-SA that includes the mistaken distribution (but by the April 15 deadline), the custodian will have to issue a corrected Form 1099-SA.

[huyiying]

My HSA account was closed in Jan 2019 and in that account there was some money left from my previous employer (I worked there in 2018). Then in March 2019 I got a check for HSA refund for my spending before the account was closed. May I still use that money (I thought that money belongs to 2018's qualification?) Spending that in 2019 will be too late or not?

Thanks!

[BMcCalpin]

One rule that many taxpayers do not know is that you may reimburse yourself for qualified medical expenses that you paid with after-tax dollars at any point in the future, so long as the original expense was incurred after the HSA was created.

What does this mean? If you have medical bills in 2019, pay them with the insurance refund. Document the bills and the fact that you used this refund rather than HSA funds to pay it. Also, if this does not use up the refund, then do you have ANY medical bills incurred after the creation of the HSA (yes, even if several years back) that you paid with after-tax dollars? If so, keep the part of the refund that applies to this and document the bills and the refund applied to them.

What we're trying to avoid is not applying the refund to qualifying medical expenses because any amount of the refund not applied to some qualifying medical expenses in 2019 you would have to declare it as income and pay a 20% penalty in addition since you can't return it to the HSA.

Make sense?

[smryoung]

My HSA sent me a Distribution Reversal Form and asked me to fill that out and to send that and the check in. But I forgot to ask, do I need to endorse check prior to sending everything in?

[dmertz]

Presumably the check was made out to you.  Check with the HSA administrator to see if they would prefer a third-party check where you sign the medical refund check over to the HSA or if they would rather have you deposit the check into your checking account and write the HSA a new check.  Third-party checks are sometimes problematic.

[4rg]

I was reimbursed for medical expenses that I paid for out of an HSA. The problem, is that now I am no longer covered by a HDHP and therefor can't make contributions to an HSA. The HSA is still open, but Im not legally allowed to contribute. So what do I do with this money? 

[Opus 17]

You have some things confused, I think.

A return of an excess withdrawal is not a contribution.  Your HSA bank may accept the money back as a return of an excess withdrawal or reimbursed expense.  (They are not required to do this, but you can ask.  It will require a special form and is not a regular deposit or contribution.)

If the bank won't accept the return, you have two choices.

1. Remember that if you have funds in an HSA, you can use them for medical expenses even if you aren't allowed to make new contributions. If you have medical expenses this year, pay them from the reimbursement instead of making a new withdrawal from the HSA.

2. Report the reimbursement as taxable income, since you never paid tax on the money before on condition it would be used for medical expenses, if you keep it now it's taxable.  There's a section in Turbotax for other uncommon income and one of the options is a reimbursement of a previous deduction. 

A reimbursement of a previous tax benefit is called a "taxable recovery."  You would report it as taxable income (since it is a reimbursement of money you never paid tax on, and is not being used for a medical expense.). There is a section under "other income"

[prda0401]

Hi, I am in the same situation, I cannot find the "other income" option like you said in Turbo Tax. Can you confirm where it is? 

[DawnC]

It is in the Less Common Income section (the last section under Federal/Personal Income).   From there choose Miscellaneous Income, and then choose Reimbursed deductions from a prior year.   @prda0401 

[prda0401]

Thanks for responding. I found another place in TurboTax where I would fill the HSA information. There was a step which says "Did you spend your HSA money on medical expenses only?", I checked "no" and then i was able to enter the amount I used for medical expense and  TurboTax substracted that amount from total distribution from my 1099 SA and marked the difference as Taxable distributions. My fed refund amount also got dropped a bit. Looks like it worked. What do you think?

[BillM223]

@prda0401 I would rather that you read and try the following, because it has the benefit of leaving the HSA custodian's paperwork the most correct.

If I understand you, you have an amount that you paid to a medical practitioner using HSA funds, and the practitioner refunded some of the money to you and not directly to your HSA. Is this correct?

If so, the correct way to deal with this is to report it (the refunded amount) to your HSA custodian as a "mistaken distribution". For background, read HSA Mistaken Distributions in the 1099-SA instructions.

Note that the HSA custodian does not have to allow the return of the mistaken distribution (see the TIP that follows in the 1099-SA instructions), so be nice, because this is the simplest way to deal with this issue.

If the HSA custodian accepts the mistaken distribution concept, they will ask you for the distributed money back - which you have, because the practitioner gave it to you. In fact, look for a mistaken distribution form on the HSA's website.

If the practitioner sent it straight back to the HSA, that's a problem, because the default action of the HSA custodian would be to report it as a contribution, which it is not. If this is the situation, come back and tell us.

[prda0401]

Thanks for providing your expert advice. Yes, you are correct in what my situation is.The problem is my HSA custodian has changed thought.
1. Is it still the process above to resolve using my current HSA custodian?
2. Is reporting the amount that was refunded to me as taxable and having it taxed not an option at all? I am thinking even if I get audited, since I paid taxes on the refund it should be ok, isn't it?

[dmertz]

You can choose to pay the income tax on the amount refunded instead of doing a return of mistaken contribution, and even if you were under age 65 in the year of the distribution that amount will not be subject to a 20% additional tax that would normally apply to taxable distributions.  [Corrected]