I signed up to contribute the maximum amount into my HSA for the year 2021 every pay period ($7200 total for family). I have had this HSA account for a couple of years now. My insurance company screwed up and forgot to pay a provider for some medical expenses back in Nov-Dec 2020 when they should have (claim says I owe $0). As a result, the provider charged my HSA for those services in Nov-Dec 2020, but I didn't know until later. After realizing this last week (Jan 2021), I immediately contacted my insurance about this. They assured me that they would take care of this and refund me all those costs back into my HSA in a week or so. My questions is would those refunds count toward my 2021 contribution? Since I'm already signed up to contribute the maximum amount, would the refund put me over the limit and cause any over-contribution penalty for me when I file my 2021 taxes? Anything I can do to prevent that? Thank you!
What you need to do is this:
1. Contact your insurance company and ask them to send the money to you, not your HSA administrator.
2. Contact your HSA administrator and tell them that you had a "Mistaken Distribution" (i.e., money paid out of your HSA that it turns out was not for a qualified medical expenses). Why was it not qualified? Because the expense should have been reimbursed by insurance - expenses to be reimbursed by insurance are not qualified medical expenses for an HSA.
3. If the HSA administrator accepts your request, then they will have you sign a form about the mistaken distribution, and then you will send them a check for that amount. This is why you need to do step #1.
The HSA administrator should also issue a corrected 1099-SA documenting your HSA distributions for the year (i.e., making sure that this mistaken distribution is not included in the 1099-SA for tax year 2020).
In no case should this "refund" be considered a contribution for either tax year, that's not the right treatment.
Instead, doing it this way makes the HSA administrator set your account correctly in case of audit. In any case, make sure that the HSA administrator treats this amount of money as a mistaken distribution and NOT as a contribution.
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Hi BillM223 thanks for your detailed response!
Since you said "In no case should this "refund" be considered a contribution for either tax year, that's not the right treatment.", wouldn't it be more convenient to just let the insurance company directly refund back to my HSA?
In fact, I don't know if it's still possible for me to contact my insurance company to not refund to the HSA, they may have already processed it. If they did indeed refund directly to my HSA, what should I do?
Yes, the HSA can directly refund the money back into your account. The repayment is not treated as a contribution.
If the mistaken distribution was reported on the Form 1099-SA, this needs to be corrected by the HSA as soon as possible. They will send you and the IRS a corrected form. See page 1 in the following link in the right column HSA Mistaken Distribution