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I used an HSA to buy some contact lenses. They came with a rebate form that I can send in to get a refund of about 1/5 of the purchase price. Is it okay to send away for the refund after using the HSA to buy the contact lenses? If I get the refund, do I have to deposit they money back into the HSA, or can I spend it any way I wish without having to pay any tax penalty on it? If I get the rebate, do I need to declare it when I do my (USA) taxes next year?

  • 1
    You use the term rebate and refund. They are 2 different things, the rebate you may be able to keep but a refund, you would need to return to your HSA. Returning it to your HSA is probably the safest method but there should be some terms listed on the rebate form that will tell you how their disbursement will be treated. – user4127 Jul 5 '12 at 16:34
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The rebate amount is a non-qualified distribution:

IRS Pub 969 describes how the HSA works:

Reporting Distributions on Your Return

How you report your distributions depends on whether or not you use the distribution for qualified medical expenses (defined earlier).

  • If you use a distribution from your HSA for qualified medical expenses, you do not pay tax on the distribution but you have to report the distribution on Form 8889. However, the distribution of an excess contribution taken out after the due date, including extensions, of your return is subject to tax even if used for qualified medical expenses. Follow the instructions for the form and file it with your Form 1040 or Form 1040NR.

  • If you do not use a distribution from your HSA for qualified medical expenses, you must pay tax on the distribution. Report the amount on Form 8889 and file it with your Form 1040 or Form 1040NR. If you have a taxable HSA distribution, include it in the total on Form 1040 or Form 1040NR, line 21, and enter “HSA” and the amount on the dotted line next to line 21. You may have to pay an additional 20% tax on your taxable distribution.

I looked at several plans regarding how to handle mistaken distributions:

example A

What if I accidentally use my HSA Visa debit card for a non-qualified expense? To fix this problem, just bring that same amount into any local branch and tell us it was a Mistaken Distribution. We can then put the funds back into your HSA and correct the problem.

example B

You’re allowed to correct mistaken HSA withdrawals when there is clear and convincing evidence that amounts were distributed from an HSA because of a mistake of fact due to reasonable cause. You can correct the mistake by repaying the withdrawal no later than April 15 following the first year that you knew or should have known that the withdrawal was a mistake. When a correction is made, the mistaken withdrawal does not have to be included in gross income or be subject to the 6 percent additional tax, and the repayment does not count as an excess contribution. If an error is made by SelectAccount in its role as the administrator, SelectAccount will be responsible for taking appropriate corrective action.

Check with your plan trustee on their procedure to fix the mistaken withdrawal.

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    +1 - So, the correct way to have handled this would be to submit the net cost of the purchase, subtracting the rebate. – JoeTaxpayer Jul 4 '12 at 15:59
  • While I think handling it this way would work I am not sure it is required. – user4127 Jul 5 '12 at 16:31
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    @Joe The best way would have been to only withdraw the net cost. That may be hard to do if a credit/debit card was used for the transaction. The complexity of the trustees procedure to redeposit the funds, and the lag time to get the rebate, would dictate if the net cost or redeposit funds is easier. – mhoran_psprep Jul 5 '12 at 16:38

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