How To Fix The Most Common HSA Mistake — Healthshare

How To Fix The Most Common HSA Mistake

mistakeSince Health Savings Account (HSA) funds are easily accessed with checks, debit cards, or even credit cards, one of the most common mistakes HSA owners make is to spend their HSA money for something other than qualified health care.  Health Savings Accounts work best for certain types patients as well, read more here. If you’re not sure what’s qualified, take a look at our list of tax-subsidized medical expenses.

Spending HSA money on anything else before you sign up for Medicare could lead to a 20-percent penalty on that withdrawal, but mistakes can be resolved so you don’t get hit with a penalty.  Here’s how:

The IRS allows you to correct “mistaken distributions.” You must have made the mistake due to a “reasonable cause” and have “clear and convincing” evidence to support that’s what happened. You have to return the money no later than April 15 following the year you knew about or should have realized the mistake.  Mistakes like this can happen quite innocently.

Example 1: Jane goes to the doctor and receives a bill for $100. She promptly pays the bill through her HSA. Later, the medical provider sends Jane a check reimbursing her for the $100 stating that the doctor visit was fully covered by insurance.

Jane, can now return that $100 to the HSA as the return of a mistaken distribution. She does not need to endorse the actual check she received and can instead deposit that money and write a personal check or otherwise make a deposit.

Example 2: Juan goes to a restaurant with his family and accidently pays the bill with his HSA debit card (it looks similar to his other cards and he was distracted by his daughter’s temper tantrum). He later discovers the mistake and can return the amount spent as the return of a mistaken distribution.

Of course, it might be a good idea to separate your HSA card and checks, so you don’t grab them by mistake very often.  You might even want to pay for some qualified expenses a different way until your HSA builds up a healthy balance with tax-free earnings.  You can go back and reimburse yourself in later years. Learn more about HSA scenarios here.

And, as I mentioned, HSA administrators are beginning to offer HSA credit cards.  Of course, that’s going into debt by actually borrowing money to pay for health care, but it could help in a pinch when you know more money’s going to be available soon after the bill is due.

Visit our health savings account web page to learn how you can reduce your taxes and pay for medical expenses with tax-free dollars and to run an instant quote.


16 thoughts on “How To Fix The Most Common HSA Mistake”

  1. Jim Corn says:

    It is very easy to grab the wrong plastic card when in a hurry. This article shows how to correct errors with your HSA credit/debit card when you purchase a non-health item using the wrong card. Much easier to correct than to get hit with 20% early withdrawal penalty. As the article suggest, “it might be a good idea to separate your HSA card and checks, so you don’t grab them by mistake very often.” It is nice to have the card for health benefits which makes it much easier than keeping all those receipts and submitting them for reimbursements. Check our HSA Administrators site to see what Banks we recommend that offer checkbook and debit card options.

  2. Genice Aquino says:

    This is some great information.

  3. John McGuire says:

    I’ve just realized that I can’t pay premiums with my hsa, but I’ve been doing it for about 6 months. How can I make this right without paying the penalties?

    1. Wiley Long says:

      Hi John,

      To avoid penalties you would have to place this money back into your HSA account. You’ll want to check with your HSA administrator for the proper forms to complete and to verify the deadline that this must be completed by to avoid penalties.

  4. Chris M says:

    In example one above, it says she “can” return the $100 to her HSA, but does she have to or can she keep the refund?

    1. Wiley Long says:


      Because the charge was fully covered by the insurance company, she would be required to send the $100 back to the HSA account.

  5. Julie G says:

    How would you return the money if you’d contributed the max already? We had both scenarios happen, but because our medical expenses were thousands beyond the max contribution (and our total savings), we were able to redirect the debit and the doctor’s and call them reimbursement for other expenses.

    1. Wiley Long says:

      Hi Julie,

      I would reference this document, and it should make it clear how to deal with this situation.

  6. Toni says:

    If a medical billing office receives a payment from the insurance company and then the HSA pays and it results in a credit balance, who is the billing office supposed to refund?

    1. Wiley Long says:

      Hi Toni,

      HSA funds are there for the policy holder to pay medical expenses which are not covered by health insurance. Therefore, it would be appropriate to refund the overpayment to the HSA, or the owner of the HSA.

  7. Becky Nelson says:

    HELP! My 19 year old son unknowingly took an HSA account with a high deductible coverage plan through his employer. This would not be an issue BUT he is on OUR BCBS family policy. I have expensed out of the HSA about $200 towards his wisdom teeth copay. I have spoken to HR and they are going to CANCEL the HSA. my question is with filing his taxes, how do I let the IRS know that this error occurred?

    1. Wiley Long says:

      Becky, if the plan is being cancelled, you should be able to reverse all your HSA contributions or deductions. The $200 you withdrew from the HSA would either have to be paid back, or it would have to be counted as income. If his employer contributed to the HSA on his behalf, they would also have to be involved in communicating with the bank and getting those contributions reversed.

  8. kured says:

    I have HSA distribution taken last year(October 2015) and is refunded this year( in august 2016). How do I deal with kind of situation? Do I need to refile my taxes?

    1. Wiley Long says:

      You should contact your HSA administrator about making a non-reportable deposit (possibly a transfer) for the refunded amount back to your HSA, and depending on the data processing system you may need to reduce the original amount by the amount refunded. Then your HSA administrator will need to correct your 1099-SA already sent to the IRS to reflect that correct distribution after the refund has been reapplied to the account.

  9. Twriter says:

    We had a surgery center overbill us and refund $1,500 directly to our HSA. So, that $1,500 contribution has technically been made twice. How do I handle this at tax time?

    1. Wiley Long says:

      If the original payment was made from the HSA, refunding it to the HSA would be appropriate, and you would just need to talk to the bank to make sure it was encoded correctly.

      If the original bill was not paid from the HSA, then yes this would be an extra contribution. You would need to withdraw the extra contribution from the account, again making sure that the bank encodes the transaction correctly.

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