Since 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.