Borrow and return HSA funds in same tax year - taxes and/or penalty?

Question

I've had an Health Savings Account for several years now, and I know I can only take out funds from it for qualified medical expenses.

I'm wondering if there will be any taxes and/or penalties if I do the following:

1. Take out $1,000 in June
2. Use the money for non-medical expenses
3. In December (same year) put the $1,000 back into the account

Since the "net withdrawn" amount in the account is $0, will the tax statement the bank sends me in January show the $1,000, or will it be 0? More importantly, is it technically allowed even if that form shows nothing was taken out?

Apparently there's a 20% penalty on top of any taxes you have to pay for any non-qualified medical expense distributions, does that still apply even though I put the money back?

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Clarification When I say "put money back" I don't mean "just make more contributions through my employer", I actually mean doing a bank transfer from my checking account, directly into my HSA. My HSA allows me to do bank transfers in/out without restrictions.

What's interesting is that when I called my HSA and asked them the same question, they told me as long as I put the money back before the end of the year, it's fine.

Answer 1

No, HSA disbursements and contributions are not "netted" like that. Contributions and disbursements are accounted for separately and must be independently qualified. Any non-qualified disbursements are subject to tax and a 20% penalty even if you have enough contributions to offset it.

There is provision to reverse a "mistaken distribution", but you must attest that the disbursement was:

because of a mistake of fact due to reasonable cause

So you couldn't use it on "non-medical expenses" and just pay it back. That provision is for payments that you reasonably think are qualified but were mistaken.

Answer 2

While there is a provision to return funds that are accidentally pulled from the account, you would have several obstacles to overcome.

Most of the time this is due to using a linked debit card accidentally. This is harder to do because the system is supposed to limit the places the card can be used. Mine can be used a a medical provider. But at the grocery store it can only be used at the pharmacy counter.

Another common occurrence is when the a payment is made before the final bill is calculated, and you over paid. This happens when the provider wants you to pay at the time of service, but they have no idea what the negotiated price is.

To do what you suggest you would have to send the funds to the doctors office, and then have them refund it.

My HSA account does allow me to do a "pay me back" distribution. That is when I paid the bill with cash or another credit card, and want to pay myself back. The HSA requires me to provide an EOB or some other receipt, otherwise they will characterize it a non-medical use.

when I have redeposited funds when I overpaid, I had to point to the linked transaction when resubmitting the funds.