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My bank lists my HSA next to my other checking and savings accounts. Sometimes I'll save money to an emergency savings fund I have. What if I transfer to the wrong account in error, and correct the error immediately? Will I get hit with a 20% penalty at tax season?

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tl;dr: yes, it's possible, but it's unlikely you'd have to actually pay it. The quick fix is to notify your bank that you made an error, and they will either notate the corresponding transactions right then and there, or (more likely) ask you to fill out a form instructing them exactly how to notate the transactions. Note you would also have to do this if you manually made online contributions to your HSA between Jan 1 and April 15 but intended them to be applied to the prior tax year.

Here's an example scenario of what could happen if you don't contact your bank:

  1. You currently have maxed out your HSA contributions for the year, which is $3,450. (This is recommended if you can afford it.)
  2. You accidentally contribute another $1K to your HSA, and realizing your mistake, you immediately transfer that $1K into the correct account.
  3. On December 31, your total distributions for the year from the HSA account were $3,000, all of which were for qualified medical expenses.
  4. You file your return in January, and since you have an HSA you attach form 8889. On this form you list $3,450 in contributions, and $3,000 in distributions. The $3,450 in contributions is tax deductible from your income on your 1040.
  5. Sometime after you file you receive a tax summary from your HSA bank. The summary shows you had $4,450 in contributions, and $4000 in distributions. This is what they reported to the IRS. You call your HSA bank, they instruct you to fill out the form as mentioned above, you do so, and they say they'll send the corrected info to the IRS.
  6. About 1 year after you filed, you receive a letter from the IRS. It's immediately clear that either your bank didn't send the updated numbers to the IRS, of if they did, the IRS hasn't updated your account to reflect the change. (This is an unfortunately common occurrence.) The letter states that their is a discrepancy between what you reported and what your HSA bank reported. The IRS assumes what the bank reported is correct and makes "proposed changes" to your return. The proposed changes are something like this: You over contributed $1K to your HSA, and you should pay a 6% penalty for doing so = $60. You also distributed $1K more than you claimed, and the IRS assumes it was not for eligible medical expenses, so you owe a 20% penalty on that = $200. You can settle by checking the box, "I agree" and sending a check for $260.
  7. Of course you check the other box, "I don't agree" and attach a letter explaining what happened. 30-60 days later the IRS will send you a letter saying they received your response and they are reviewing it. About 60 days after that you'll receive another letter stating they agree with your explanation and no money is due (unless you really botched your explanation).

So, contact your bank and they'll tell you what to do. It's always best to get corrections reported to your bank prior to Dec 31 to avoid the hassle of dealing with excessive IRS paperwork.

  • Thanks for the response. I'm new to having an HSA, so I'm unsure on how it all works. Unfortunately, I talked to my bank directly about this issue before posting it on SE, and their response was "talk to your accountant". – Lil' Bits Aug 13 '18 at 16:08
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    @Lil'Bits - that' odd that your bank wasn't helpful. Maybe the person you spoke to was a general banking support person and just wasn't knowledgeable about HSA processes. Maybe you would have to speak to someone specifically in the HSA department. You could start by looking at your next HSA account statement and see your contributions and distributions history, as well as YTD. This way you'll see how they classified the transactions, and it might be obvious if you'll need to have the bank re-classify them. – TTT Aug 13 '18 at 16:12

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