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]

@prda0401 

I disagree that the money is necessarily subject to a 20% excise tax. You have added on to an old discussion and you have not provided any specific details for your situation. If you paid the expenses in 2022 in good faith, and then you received the refund also in 2022, then you should try to return it to the HSA account as a mistaken withdrawal.  If you can’t return the money, and if you don’t have other 2022 medical expenses that can offset the distribution, then you would be subject to the excise tax.  

However, if you paid the medical expenses in a past year in good faith, and received the refund in 2022, then I don’t believe you are subject to the additional 20% excise. You would simply report the refund as “taxable other income“ in the category of a taxable recovery, that is a reimbursement of a previous  tax deductible item.  (If it is a refund of a reimbursement from a prior year, you wouldn’t be able to return it to the account as a mistaken distribution distribution, even if you had not changed accounts.)

[dmertz]

Opus 17, you are correct.  I've reviewed IRA Notice 2004-50 Q&A 37 and it indeed says that the taxable part of the distribution under these circumstances is not subject to the additional tax under section 223(f)(4).  I've made the correction to my previous post.

[prda0401]

Hi Opus 17,

I paid my medical provider through my HSA card and they partially refunded it back to me in 2022. My HSA custodian has changed right after 2022 and I called my current custodian and they cannot take the refund back. Right now in Turbo tax Under HSA section in "Wages and Income", I see and option to put the refund as Taxable distributions. Is that ok to report the refund in my tax filing for 2022 ? or I cannot fine the option (“taxable other income“ in the category of a taxable recovery) you mentioned in your advise in Turbo tax. I see an option which @DawnC mentioned which is "Reimbursed medical expense".  Which one is the proper way to report it?

Update; 

When I followed the step using @DawnC  instruction I see I get the most refund.  

[prda0401]

@DawnC sorry, I had to come back again, looks like this option is for when I have reimbursement on the prior year's tax return i.e. tax return of 2021. My situation is I got a reimbursement in the same year for which i am filing tax right now which is 2022. Is there another option to include it in this year on turbo tax? 
The thing is if I file using the option you gave, in the state tax filing, there is a weird step which says I have to file Schedule A or something like that.  Please advice. 

Thanks again!

[DianeW777]

Since you are unable to replace your funds in the Health Savings Account (HSA) your refund/distribution that was not used for medical purposes is reported as other income and penalized because you are unable to repay it to the HSA.  Use the link below for additional details.

• Taxable HSA Distribution
• IRS Procedures for HSAs (page 18, Number 37) You do have until April 18th to see if you are allowed to repay the funds even if, at the moment, the plan administrator is not allowing it.
• Check your state after you complete your federal return.

When you have your TurboTax return open use the Search box > type 1099sa > click the Jump to... link> begin to follow the screen prompts an and answer the questions. 

@prda0401 

[DawnC]

What state are you in?    You can use Other Reportable Income (recovery of an item you previously deducted) for a reimbursement you received in 2022.  

[prda0401]

ohio