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My employer erroneously deducted $1083 from my after tax paycheck and deposited it into my HSA account. When I brought it to my employer's attention they reversed the transaction deducting the $1083 from my HSA and rightfully gave me the money. My bank reported the $1083 as a distribution to the IRS which is incorrect. I went to my bank and they told me there is nothing they can do because it was a distribution. How do I handle this?

  • Was this $1083 an excess contribution (over the limits that you are eligible to contribute), or was it simply a contribution that you did not want to make? – Ben Miller Mar 5 '18 at 4:04
  • Did your employer include this $1083 amount on your W-2 Box 1 income, or did they deduct it from your income before reporting on Box 1? – Ben Miller Mar 5 '18 at 4:06
  • No the 1083 was not in excess, it was a contribution that I did not want to make. Yes they included in income. My normal HSA contribution is post tax. Instead of my normal amount they put 1083 into the HSA account. – Curtis Mar 6 '18 at 2:37
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One way to handle this would be to return the money back to your HSA as a mistaken distribution repayment. To do this, you need to tell the bank that the money you are sending in is a mistaken distribution repayment; they may have a form you need to fill out. This option will essentially undo the withdrawal, and if you get this done before you file your taxes you won’t owe the penalty and can take the tax deduction for this contribution. Of course, you didn’t want to make this contribution in the first place, so this doesn’t necessarily fix that problem the way you want all by itself.

Ask yourself if you have had any legitimate medical expenses that have not been reimbursed. You can go all the way back to the point in time when you first opened your HSA. Remember that there are lots of different expenses that qualify; in addition to doctor visits and prescriptions, things like dental procedures and chiropractic also qualify. See IRS Publication 502 for a list of qualified expenses. If you find that you have had $1083 in unreimbursed expenses (and have the documentation to prove it), then you can claim on your tax return that this distribution was for qualified medical expenses. If you have less than that in expenses, you’ll want to return the rest via the mistaken distribution repayment.

You might be tempted to try an excess contribution withdrawal, which is normally done when you find that you have contributed more than your limit. However, the IRS has clarified that excess contribution withdrawals are not allowed if you haven't actually contributed past your contribution limit.

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