If I take a HSA withdrawal for non-medical purposes and replenish the funds before the year end, will I still have to pay taxes?

[VictoriaD75]

Yes. You will receive a 1099-SA from the HSA provider indicating your disbursements. You must indicate whether or not they were for qualified medical expenses.

In TurboTax, follow these steps:

• Under the Federal menu, click on Deductions & Credits
• Expand the menu for Medical
• Click Start/Revisit next to HSA, MSA Contributions
• When you get to the screen Did you use your HSA to pay for anything in 2019? Answer Yes.
• Enter the information from your 1099-SA
• After entering the information, click the radial button next to Yes, I only used it for medical expenses on the screen Did you spend your HSA money on medical expenses only? If you answer No, I didn't you will be allowed to indicate how much was used for medical expenses.

[sandeep_challa]

Thank you very much for the reply. So repaying the entire amount before the end of the year will not help me save taxes and penalties if applicable. Is that correct?

[MinhT1]

Yes. You are correct. Replenishing the amount will count as a new contribution and will not reduce the amount you withdrew. You will still have to pay tax and penalties on the amount withdrawn for non-medical purposes.

[Opus 17 · Accepted solution]

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@sandeep_challa wrote:

Thank you very much for the reply. So repaying the entire amount before the end of the year will not help me save taxes and penalties if applicable. Is that correct?

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The answer is "maybe."

You may be thinking of an IRA, where you can return a distribution within 60 days and it doesn't count as a distribution.  (Sometimes longer than 60 days in certain exceptional circumstances.)

There is no such provision for an HSA.  However, you can sometimes perform a "return of mistaken distribution" which has the same effect.  This is what the IRS says:

HSA mistaken distributions.

If amounts were distributed during the year from an HSA because of a mistake of fact due to reasonable cause, the account beneficiary may repay the mistaken distribution no later than April 15 following the first year the account beneficiary knew or should have known the distribution was a mistake. For example, the account beneficiary reasonably, but mistakenly, believed that an expense was a qualified medical expense and was reimbursed for that expense from the HSA. The account beneficiary then repays the mistaken distribution to the HSA.

Note that account trustees are not required to accept a return of mistaken distribution.  You would need to check first with your plan administrator to see if this is allowed.  It's not a regular contribution, it would require you fill out a special form on which you must certify that the original distribution was "because of a mistake of fact due to reasonable cause."

You seem to want to borrow this money for non-medical purposes and put it back.  That's not what an HSA is for and is not a "mistake of fact due to reasonable cause" so you would be lying on the form when you try to return the "mistaken" contribution.  If audited, you would be exposed to the original tax and penalty, plus additional penalties for knowingly filing false documents.  Most people are not audited.  Only you can determine the level of risk you want to expose yourself to on your tax return. 

[dmertz]

You are permitted to take a distribution from an HSA and roll that distribution back into the same HSA or a another of your HSA accounts within 60 days, subject to the limitation that you can only roll over one such distribution made in a 12-month period, the same as you can with a distribution from an IRA.  If you fail to roll over the HSA distribution, either because you miss the 60-day deadline or doing so would violate the one-rollover-per-12-months limitation, and you do not apply it to qualified medical expenses, it's taxable as ordinary income and, if you are under age 65 at the time of the distribution, also subject to a 20% early-distribution penalty.

Intentionally taking a distribution that you know will not be used for qualified medical expenses would not be a mistaken distribution that you can redeposit as a return of mistaken distribution.  To be eligible to be returned as a mistaken distribution you must have a good-faith belief that it is being used to pay a qualified medical expense.  A mistaken distribution generally occurs when you unexpectedly receive a reimbursement of some amount already paid from the HSA for a medical expense.