HSA refund

[KateBee]

I used my HSA to pay out-of-pocket for a qualified medical expense in late 2019. It turned out the expense was a covered benefit and my health insurer has sent me a refund check. I have two questions:

1. Can I offset the refund ($118.99) against $600 I paid in 2018 via direct debit from my bank account to cover my son's orthodontic charges? (I did not get the $600 reimbursed by my HSA; nor did I itemize deductions in 2018 in order to claim them back.)

2. Or, can I offset the refund against a 2020 qualified medical expense by using my debit card to pay that expense?

Thank you for any advice!

[HelenC1 · Accepted solution]

Yes, you can offset the health insurance refund of $118.99 against a portion of the $600 you paid in 2018, for your son's orthodontic charges, as long as your son is your dependent.

If you received the health insurance refund in 2020, you may use it for any IRS approved medical and dental expenses that you paid with out of pocket monies, in 2020. See IRS Publication 502 Medical and Dental Expenses.

Another option is to put the money back into your Health Savings Account (HSA). You'll need to contact your HSA administrator and inform them that this is a return of a previous withdrawal.  Simply depositing the money into your HSA may be considered a new HSA tax deductible contribution. For additional information see IRS Publication 969 Health Savings Accounts & Other Tax-Favored Health Plans.

[dmertz]

Regarding question #1, you can only do this if the orthodontia expenses were incurred after the date your HSA was established, generally the date that the first contribution was made to the HSA.

With regard to #2, the proper way to do it is a HelenC1 said, ask your HSA custodian to accept a return of mistaken distribution of the $118.99.  You can then make a new distribution to cover new expenses.  While the result would be the same as just applying the $118.99 directly to the new expense incurred in 2020, the IRS has never issued any guidance indicating that just applying it to the new expense is permissible.  I probably wouldn't worry too much about it if the new expense had occurred in 2019 after the original $600 distribution in 2019, but I would be a little concerned about doing so with a new expense incurred in 2020.

[KateBee]

Thank you so much: offsetting it against the 2018 orthodontics payments will save me some trouble!