How do I correct an HSA distribution when I was refunded by a health provider?

Question

At work I'm covered by an HDHP with an HSA. My dentist has the policy of estimating the amount that my insurance will cover and asking for the remainder at the time of service. On my most recent visit, the office grossly miscalculated the amount that my insurance would pay and ended up charging me more than they should have. Now that the insurance has paid their portion, the dentist owes me a refund of the overcharge.

If I've already sought reimbursement for the original amount of out-of-pocket expense from my HSA (it's a qualified expense), what do I need to do (if anything) to make the HSA whole? I'm assuming that this can't be corrected by an additional contribution. Is there some form of excess distribution (the converse of an excess contribution)?

Possibly related: Can return fees be reimbursed from an HSA?

Answer 1

This is referred to as an HSA Mistaken Distribution.

An HSA mistaken distribution occurs when you take a distribution and later find out that it is not for a qualified medical expense. For example, this could occur if you accidentally pay for a restaurant dinner with your HSA debit card. It can also occur if you take a distribution to pay for a medical expense, but then are later reimbursed by insurance.

This is discussed in the instructions for IRS forms 1099-SA and 5498-SA. (Note: these forms are submitted by the HSA bank, not the consumer, so the instructions are addressed to them.)

HSA mistaken distributions. If amounts were distributed during the year from an HSA because of a mistake of fact due to reasonable cause, the account beneficiary may repay the mistaken distribution no later than April 15 following the first year the account beneficiary knew or should have known the distribution was a mistake. For example, the account beneficiary reasonably, but mistakenly, believed that an expense was a qualified medical expense and was reimbursed for that expense from the HSA. The account beneficiary then repays the mistaken distribution to the HSA.

You have until April 15 in the year following the refund to repay the HSA and avoid the extra tax and penalty that should be paid if you were to keep the distribution that was not ultimately used for medical expenses. When you send the money to the HSA bank, you need to explicitly tell them that it is a mistaken distribution repayment, so that they can report it to the IRS correctly and it will not affect your contribution limits.

Answer 2

You have several options:

• Insist that you will pay them from the HSA only when the final bill has been determined.
• Insist that they reverse the charges back into the account. This works great if you have a credit/debit card for the HSA account.

If they refuse the second option, and the incident has already happened look on the HSA website for the form and procedure to return a mistaken distribution.

I have used the two options with all our medical providers for the last 3 years. Some preferred option1, some preferred option 2, but none refused both. One almost did, but then reconsidered when they realized I was serious.

While there is an April 15th deadline to resolve the mistake, I have found that by requesting the provider accept one of the two options the number of mistakes is greatly reduced.