Paid from HSA received refund

[Sendankit2]

I paid $2339 from my Optum HSA account to doctor during my wife’s pregnancy back in July 2023 and that account is not active anymore.

I received a refund check of $1495 on March 21st 2024 with my wife’s name on it. I have Cigna HSA now and I am the primary account holder.

Issues here:

-Optum HSA account is not active.

-Check is on my wife’s name

-Cigna HSA is active and if I put the funds as contribution that it will come as contributed fund but this is actually a refund from 2023.

Can you please guide me how can I put that money back in my HSA?

[KrisD15]

I suggest you claim that as "other income" for your wife, then make that much as a contribution for 2024. 

That amount would first be taxed, and then become a tax deduction, so it would zero out, although you would lose that much of your yearly contribution limit for the active account.

[Sendankit2]

I am concerned if IRS will charge 20% penalty because these are HSA funds and if transferred to my wife’s bank account and do the contribution. Also, this amount was deducted from my account in the first place and depositing to my wife’s account wouldn’t create an issue?

[BillM223]

Kris's solution is an elegant solution. @KrisD15 

Normally, you would report the $1,495 as a Mistaken Distribution, which would allow you to put the money back in the HSA without being considered a contribution. But this is now impossible since the original HSA is closed.

So you want to be able to get the money into a new HSA without getting another deduction for the same dollars (because that would be double-dipping). So you declare the $1,495 as income, then reduce your income when you contribute the $1,495 into your new HSA.

The net result is that you do not double-dip, yet the money is now in your new HSA.

[Mike9241]

see if your HSA custodian will accept a check to your wife endorsed over to you. 

Because the refund was in 2024, it's unknown if the insurance company will issue any type of tax form for 2024

If you pay a medical bill using your Health Savings Account (HSA) and later receive a refund from your insurance company, the refunded amount should be deposited back into your HSA to avoid tax penalties. This is because the expense for which you used your HSA funds is no longer considered a qualified medical expense after the refund. (I assume you were the owner of the Optum HSA so switching between accounts you own should not matter) There is no such thing as a joint HSA - one taxpayer per account

1. Deposit the Refund: Deposit the refund check into your HSA.
2. Mistaken Distribution: If you’ve already claimed the expense, you may need to fill out a form indicating that the refund is a correction of a mistaken distribution to ensure it doesn’t count towards your annual contribution limit. 
3. Keep Records: Maintain records of the transaction to show that the expense was initially paid from the HSA and that the refund was returned to it.

[Opus 17]

@Sendankit2 

You basically have three options.

1. Put the money back into the old (closed) HSA as a return of excess distribution.  The bank may or may not allow that.  (It is extremely unlikely that the new HSA will accept the check as a return of mistaken distribution.)

2. Spend the money in 2024 for medical expenses that you do not request HSA reimbursement for.  If you will have pediatrician visits, co-pays, vision and dental expenses that are more than $1495 in 2024, just figure you are using this money to pay those expenses.

3. Report the refund as a type of taxable income called a "taxable recovery", a refund of a previous tax deduction or tax-free amount, on your 2024 tax return.  If you look in the "Other uncommon income" section in Turbotax, there may be a specific entry for reporting a reimbursement of a previous deduction.  If not, reporting it as other miscellaneous income is the correct thing to do.  This will not be subject to the 20% penalty for HSA expenses used for non-medical purposes (either now or even if you are audited later), because you operated in good faith in 2023 when you withdrew the money.  (And note that if you had, say, $1000 of medical expenses, and you don't request new reimbursement, then you have "used up" $1000 of the refund, and only the remaining $495 represents a taxable recovery.)

Whether or not you make a new HSA contribution to give yourself a tax deduction is an entirely separate matter, depending on the type of health insurance coverage you have and what your contribution limit for 2023 or 2024 would be, and whether you have reached those limits yet.