My husband retired and initially had a SERMA account that paid Health insurance premiums (we continued with a retirement HDHP through his employer). When the SERMA ran out this year, we first put our bank account credit card on the account to pay premiums, but then the employer's insurance person told him he could use his HSA to continue paying premiums instead of out of pocket. That meant setting up the HSA debit card to pay the monthly premium. We did that. Then, to avoid having to change payment cards, we deposited $7000 into the HSA so we could just use that card to pay. Well - my husband is under 65. His former employer knew that but still told him to use his HSA. I was looking at HSA rules today and saw that, in fact, my husband can not use his HSA to pay for insurance premiums and now we will have to pay tax on the money and pay 20% penalty. This is October - we just deposited the $7000 in May.
To date, the amount we have withdrawn for premiums is $10,000. Each withdrawal is identified as insurance premium. They are the only withdrawals this year. We do have around $1000 of health expenses that we paid out of pocket that I hope can offset some of the withdrawal even though the withdrawal identified as "ins premium".
Is there anything else we can do? Since $7000 of the money was deposited and then withdrawn this year is there any way to correct for that amount? I assume if we refund our HSA it will look like an excess contribution. I realize we will get a deduction for our $7000 contribution this year, but we will also be charged an additional 20%.
Update - I see you can rollover an amount from an HSA just like from an IRA. If my husband opens another HSA, can he "rollover" distributions that were made in the last 60 days. They would still be identified as an insurance premium in the HSA records, but we would just use our own money and put the same amount in the new HSA. ( assume you can't "rollover" to the same HSA you withdrew from.)
That would at least cover some of the distribution
Rollovers are limited to rolling over only one distribution in any 12-month period, so only one of the distributions made in the last 60 days is permitted to be rolled over.
Instead of doing a rollover, you might be able to get the HSA to accept a return of mistaken distribution, although I'm not sure if this qualifies as a mistaken distribution. A mistaken distribution is one where "the account beneficiary reasonably, but mistakenly, believed that an expense was a qualified medical expense and was reimbursed for that expense from the HSA." I don't know if not understanding the law and getting incorrect information from the former employer is "reasonable" cause. It's up to the HSA administrator to make that determination. Also, the HSA is not required to accept a return of mistaken distribution even if you have reasonable cause. HSAs are generally more likely to accept returns of mistaken distributions if done in the same year as the distribution since they will not have to issue any corrected Form 1099-R to reduce the amount of distributions reported on an original Form 1099-R.
Also, the distributions can be used to cover any qualified medical expenses incurred after the establishment of the HSA, so you might have past medical expenses beyond the $1,000 you mentioned to which you can apply these distributions.
I see that the acronym SERMA is most often associated with Intel's IRMP program, which retirees can use to help pay for health insurance premiums after retirement.
If you indeed retired from Intel, then I suggest that you try the following: contact "the employer's insurance person" (the one that spoke to your husband) and persuade them to contact the HSA administrator on your behalf to accept the return of the distributions for the insurance premiums as "mistaken distributions". dmertz is correct that the HSA administrator is not required to accept the request; however, the fact that Intel must have a significant relationship with the HSA custodian ought to give Intel some leverage with the HSA administrator (I assume that the HSA for you was set up while at Intel and that HSA contributions are made through Intel). At the least, the insurance person who gave you the bad advice should feel motivated to give it a try to make up for the error.
After all, this is just a little paperwork for an HSA administrator who has a large contract with a mega-corporation, but it's a big deal for you. Give it a chance.
The IRS states in the instructions for form 1099-SA:
"As the trustee or custodian, you do not have to allow beneficiaries to return a mistaken distribution to the HSA. However, if you do allow the return of the mistaken distribution, you may rely on the account beneficiary's statement that the distribution was in fact a mistake. See Notice 2004-50, 2004-33 I.R.B. 196, Q/A-76, available at IRS.gov/irb/2004-33_IRB/ar08.html. Do not report the mistaken distribution on Form 1099-SA. Correct any filed Form 1099-SA with the IRS and the account beneficiary as soon as you become aware of the error."
See page 1 at https://www.irs.gov/pub/irs-pdf/i1099sa.pdf
The way this is worded gives the HSA administrator broad latitude on what they can accept as a mistaken distribution. The net effect of this wording is to give an HSA administrator a way to refuse to accept the mistaken distribution if the circumstances do not match what a "mistaken distribution" should be, but it clearly allows the HSA administrator - if it so chooses to spend the time and money - to just accept that the distribution was mistaken and continue with the process.
Thus my advice to give the HSA administrator motivation (keeping a large client happy in return for a small favor) to accept the return of the mistaken distributions and to update the requisite forms.
Q&A-76 allows the HSA administrator to decline to accept any return of mistaken distribution, even if the mistaken distribution clearly meets the definition of a mistaken distribution. There are no circumstances where an HSA administrator must accept the return of mistaken distribution.
I agree, and I hope that you did not read my answer to suggest otherwise. My intent was to point out that the HSA administrator can choose to accept a return of mistaken distribution, even if the reasons are not clearly for a "reasonable cause".