If you took money out of your Health Savings Account (HSA) by mistake, you may be able to correct it and avoid taxes and penalties.
A mistaken distribution can happen when you reasonably believed an expense qualified for HSA reimbursement, but later discovered it did not.
Example of a Mistaken Distribution
Let's say you used HSA funds to reimburse yourself for a medical expense that you thought was qualified. Later, you learn that the expense doesn't meet IRS requirements. In that case, the withdrawal may be considered a mistaken distribution.
How to Fix a Mistaken HSA Distribution
If the distribution resulted from a reasonable mistake, you can repay the amount to your HSA by April 15 of the year following the year you knew, or reasonably should have known, the distribution was made in error.
Tax Treatment of a Repaid Mistaken Distribution
When you repay a qualifying mistaken distribution:
- The distribution is not included in your taxable income.
- The distribution is not subject to the 20% additional tax that generally applies to nonqualified HSA withdrawals.
- The repayment is not treated as an excess contribution, so it won't create excess contribution penalties.
Reporting the Correction
Your HSA trustee or custodian may have specific procedures for returning a mistaken distribution. Contact your HSA provider as soon as possible to learn their repayment process and any documentation requirements.