Can I Get My HSA Money Back? Refunds, Taxes, and Contributions Explained

Health Savings Accounts (HSAs) offer tax advantages for medical expenses, but withdrawing funds isn’t always straightforward. Whether correcting an excess contribution or considering a non-medical withdrawal, understanding the rules is essential to avoid penalties and unexpected taxes. Knowing your options ensures compliance with IRS regulations while maximizing benefits.

Excess Contributions

Exceeding IRS contribution limits triggers a 6% excise tax on the excess amount for each year it remains in the account. For 2024, limits are $4,150 for individuals and $8,300 for families, with an additional $1,000 catch-up contribution for those 55 and older.

To avoid penalties, excess contributions must be withdrawn before the tax filing deadline, typically April 15 of the following year, or October 15 with an extension. Any earnings from the excess must also be removed and reported as taxable income. If not withdrawn in time, the excess remains in the account and incurs the 6% penalty annually.

Alternatively, the excess can be applied to the following year’s contribution limit, but this only helps if new contributions are reduced accordingly. Otherwise, the penalty continues.

Withdrawals for Qualified Expenses

HSA funds can be used tax-free for qualified medical expenses, including doctor visits, prescriptions, dental and vision care, and certain over-the-counter medications. Medical equipment such as wheelchairs, hearing aids, and insulin supplies also qualify.

The expense must occur after the HSA was established to be eligible for reimbursement. However, there is no deadline for withdrawing funds for past medical expenses, as long as they were incurred while the HSA was active and proper documentation is maintained. This allows account holders to let funds grow tax-free before reimbursement.

Keeping receipts, invoices, and insurance statements is essential to verify that withdrawals were for eligible expenses. If audited, failure to provide documentation could result in taxes and penalties. Some HSA providers offer online tools to track and store receipts, simplifying recordkeeping.

Non-Medical Distributions

Using HSA funds for non-medical expenses before age 65 results in income tax on the withdrawal plus a 20% penalty. For example, withdrawing $5,000 for personal use would not only be taxed at the account holder’s income tax rate but also incur a $1,000 penalty.

After age 65, the 20% penalty no longer applies, making non-medical withdrawals similar to distributions from a traditional IRA. While still subject to income tax, funds can be used for any purpose. Some individuals treat their HSA as a supplemental retirement account, letting the balance grow tax-free before using it for retirement expenses.

Tax Implications of Improper Disbursements

Improper HSA withdrawals must be reported as taxable income on Form 8889 and carried over to Form 1040. Failing to declare these distributions could trigger an audit, interest charges, and additional scrutiny from the IRS.

An unplanned increase in taxable income can also affect eligibility for tax credits and deductions. A higher adjusted gross income (AGI) may reduce benefits like the Premium Tax Credit or Student Loan Interest Deduction and potentially push taxpayers into a higher tax bracket.

State tax treatment of HSAs varies. While most states follow federal rules, California and New Jersey do not provide state tax benefits for HSAs, meaning improper withdrawals could result in additional state tax liabilities.

Refund Options from Plan Administrators

Retrieving funds from an HSA depends on the reason for the request and the policies of the HSA custodian. Excess contributions can be withdrawn to avoid penalties, but other refund scenarios require administrator approval. Some providers allow corrections for mistaken distributions, but these must typically be addressed within the same tax year.

If an HSA withdrawal was made in error—such as using the account for a non-medical expense by mistake—some administrators permit a return of funds under IRS guidance. The account holder must demonstrate that the withdrawal was unintentional, redeposit the funds before the tax filing deadline, and notify the HSA provider for proper documentation. Not all custodians offer this option, so checking with the plan administrator is necessary.

If an employer contributes to an employee’s HSA in error, the IRS allows for a refund under specific conditions. Employers must provide documentation proving the mistake, and the refund must be processed within the same tax year. Employers should coordinate with payroll and benefits teams to ensure compliance when handling contribution reversals.

Recordkeeping Essentials

Maintaining accurate records is essential for IRS compliance. HSA custodians are not responsible for verifying whether distributions are for qualified medical expenses, so the account holder must keep detailed documentation.

Receipts, invoices, and insurance statements should be retained for every HSA withdrawal. Digital storage solutions, such as cloud-based receipt management apps or financial software, can help organize records efficiently. Some HSA providers offer integrated tools for tracking expenses, allowing users to upload receipts and categorize transactions. Keeping a log of expenses, including dates, amounts, and descriptions of services, further streamlines recordkeeping and ensures compliance.