How to Get HSA Money Back After an Erroneous Payment

Health Savings Accounts (HSAs) help individuals save for medical expenses, but mistakes happen. Whether you used HSA funds for a non-qualified expense or overpaid a provider, correcting the error is crucial to avoid tax penalties and keep your account in good standing.

Common Reasons for HSA Refund Requests

Mistaken transactions often stem from confusion about eligible expenses. The IRS defines qualified medical expenses, but not all healthcare-related costs qualify. For instance, vitamins and cosmetic procedures are ineligible, though many assume otherwise. Using HSA funds for these purchases requires a correction to avoid taxes and a 20% penalty.

Billing errors from healthcare providers can also lead to refund requests. A provider may charge the wrong amount, double-bill, or fail to apply insurance adjustments before processing payment. If an HSA covers an incorrect charge, the overpayment must be addressed. Some providers issue direct refunds, while others require the patient to dispute the charge.

Another issue arises when individuals reimburse themselves from their HSA for out-of-pocket medical expenses that turn out to be ineligible. If the reimbursement exceeds the actual expense or was for a non-qualified cost, the excess funds must be returned. Improper reimbursements can trigger IRS scrutiny, especially in an audit.

Steps to Correct an Erroneous HSA Payment

The IRS allows mistaken distributions to be corrected if the repayment occurs before the tax filing deadline, including extensions, for the year of the mistake. If not repaid in time, the amount is considered a non-qualified distribution, subject to income tax and a 20% penalty.

To fix the error, the funds must be redeposited into the HSA as a return of mistaken distribution, not a new contribution. If treated as a contribution, it could push the account holder over the annual limit—$4,150 for individuals and $8,300 for families in 2024, with an additional $1,000 catch-up contribution for those 55 and older—resulting in a 6% excise tax on the excess amount.

If the erroneous payment involved a third party, such as a medical provider or pharmacy, obtaining a refund may be necessary before redepositing the funds. Some providers issue refunds directly to the HSA, while others send a check or credit the account holder’s personal bank account. If the refund is not automatically returned to the HSA, the account holder must transfer the funds back manually. Keeping records of the original payment, refund, and redeposit is essential in case of an IRS audit.

Contacting Your HSA Provider

The process for correcting an HSA mistake varies by financial institution. Some providers allow online refund requests, while others require a written request or direct customer service interaction. Understanding your provider’s specific procedures ensures efficient processing.

Before contacting the HSA provider, gather relevant documentation, including transaction records, receipts, and correspondence with medical providers or merchants. Some administrators require a written explanation detailing why the payment was incorrect and how the funds will be returned. If a specific form is needed, obtaining and completing it in advance prevents delays.

Customer service policies differ among HSA providers. Some have dedicated support teams for account corrections, while others require multiple follow-ups. If the initial representative is unfamiliar with mistaken distribution procedures, requesting a specialist or supervisor may help. Some banks also have HSA compliance departments to ensure corrections align with IRS rules.

Handling Tax Implications

Correcting an HSA transaction has tax consequences. The IRS treats HSA distributions as tax-free only if used for qualified medical expenses. If an erroneous payment is not corrected in time, it must be reported as income on Form 8889, filed with Form 1040, which can increase taxable income.

State taxes may also be affected. While most states follow federal HSA tax rules, some—such as California and New Jersey—do not offer state tax deductions for HSA contributions. Improper distributions in these states could lead to additional tax obligations. If an error is discovered from a prior tax year, amending past returns may be necessary. The IRS allows taxpayers to file Form 1040-X to correct previously reported HSA distributions, though this process can be time-consuming and may result in additional taxes, interest, or penalties.