HSA refund

Forum|Forum|6 years ago
September 15, 2019
1 reply
9 views

Last week, I received a refund for a medical procedure that I had paid through an HSA. This had come up a couple of times before, and I merely returned it to the HSA as a return of a previous withdrawal (there was a form to fill out, or something). This time, it's a bit more complicated--the HSA from which the funds were drawn no longer exists, and the procedure was performed in 2017! How do I submit it as a return of a previous withdrawal if it wasn't taken from my current HSA? Am I just stuck declaring it as income? It's certainly not going to fall within the correct calendar year. Any suggestions? Thank you in advance.

BillM223

Level 15

If you can't apply the refund to qualifying medical expenses in 2019, then, yes, you will likely have to declare the refund as income and not only pay income tax but also a 20% penalty in tax year 2019. However, you have two alternatives:

(1) Do you have (or will you have) any medical bills before the end of calendar year 2019? If so, pay these bills with the refund. Keep the receipts and document what you paid with the refund in case the IRS ever asks.

(2) Were there any medical bills in the past (but incurred since the HSA was created) that you paid with after-tax dollars? If so, apply the refund to this amount, as if you requested a reimbursement of HSA finds for prior year expenses. Note, it doesn't matter how far you go back, so long as the expense was incurred after the HSA was created (generally, the date of the first contribution). If you can do this, then document the receipts and what you did in case anyone ever asks.

No, this isn't exactly the right process but since, to my knowledge, the IRS has not addressed the situation of a mistaken distribution from a closed HSA (perhaps someone will update us on this), and since the net effect on your tax benefits is the same as if you returned the "mistaken distribution", and since you have documented all this (right?), you should be OK if anyone ever asks.

Otherwise, to stay on the right side of things, you would probably have to declare any part of the refund that was not charged off to qualifying medical expenses to your income in 2019, and pay the income tax and penalty.

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dmertz

Level 15

A return of mistaken distribution does not have to be in the same calendar year as the distribution. It only has to be accomplished " no later than April 15 following the first year the account beneficiary knew or should have known the distribution was a mistake." To do a return of mistaken distribution in this case would require the HSA administrator involved to reopen the HSA, accept the return of this mistaken distribution and issue a corrected 2017 Form 1099-R. However, since an HSA is not required to accept a return of mistaken distribution, it's likely that the HSA administrator will decline to accept this one, given the circumstances.

BillM223

Level 15

"perhaps someone will update us on this" - @dmertz you are just who I was thinking of 😉

Lacking the OP's ability to convince the original HSA custodian to reopen the HSA and accept the mistaken distribution, am I correct in thinking that applying as much of the refund as possible to current and prior qualifying medical expenses is about the only way to avoid declaring the refund as income at the end of tax year 2019?

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