How To Fix The Most Common HSA Mistakes (2024)

FAQs

How do you correct HSA errors? ›

The IRS allows you to correct “mistaken distributions.” You must have made the mistake due to a “reasonable cause” and have “clear and convincing” evidence to support that's what happened. You must return the money no later than April 15 following the year you knew about or should have realized the mistake.

The HSA contributions that you make directly to your HSA (outside of your employer's payroll system) are reported on Line 2. If your HSA contributions are deducted from your paycheck and/or your employer contributes on your behalf, those contributions should be listed on Line 9 instead.

So, your first step would be to call your HSA custodian and ask them if they'll let you return the mistaken distribution. If they will, and assuming you have the money on hand, you'll need to send it back to your HSA by April 15.

Many issuers are no longer approving FSA/HSA transactions at merchants registered under the 90% Rule. If an FSA/HSA transaction is declined, the cardholder will need to pay with another method of payment and submit a claim form with their itemized receipt to their FSA/HSA issuer for reimbursem*nt.

If you exceed the maximum contribution limit, there is a penalty imposed by the IRS. Sign in to your account online to download the Health Savings Account (HSA) Excess Contribution Removal Form to request an excess contribution refund or a correction to a contribution.

The main downside of an HSA is that you must have a high-deductible health insurance plan to get one. A health insurance deductible is the amount of money you must pay out of pocket each year before your insurance plan benefits begin.

Critique: HSAs Won't "Reduce the Burdens of Medical Debt."

Most Americans who receive coverage through small employers or via federal- or state-facilitated marketplaces, and many who are covered by large companies, have plans with deductibles that exceed $2,000 per person and $4,000 per family.

Max out your contributions if you can

The more you can contribute, the more you can benefit from the HSA's potential triple tax advantages¹. Keep in mind: you don't lose any unspent funds at the end of the year. Your HSA can be used now, next year or even when you're retired.

However, total withdrawals from your HSA are reported to the IRS on Form 1099-SA. You are responsible for reporting qualified and non-qualified withdrawals when completing your taxes. You are also responsible for saving all receipts as verification of expenses in the case of an IRS audit.

What is the HSA reimbursem*nt loophole? ›

Keep in mind that you can reimburse yourself for any expense at any point, as long as it was incurred after your HSA was established. So if you had an expense that you paid out-of-pocket last year after your HSA was established, but want to reimburse yourself for it this year, you can do so without penalty.

The last-month rule comes with an important catch, though. You must stay enrolled in an HSA-eligible health plan for a one-year "testing period" running from December 1 of the year you contribute to December 31 of the next year.

Unfortunately, pediatric diapers like Pampers don't qualify as eligible expenses through an FSA or HSA. However, if your toddler or child has a diagnosed medical condition that keeps them from being potty trained or has delayed potty training, their incontinence products would qualify for eligibility.

For a vitamin or supplement to be considered eligible, it must be prescribed by a healthcare provider to treat a diagnosed medical condition. This means that simply purchasing vitamins for general health maintenance purposes would not qualify for HSA reimbursem*nt.

Because HSA administrators don't track the purchases employees make with their HSA, employees should make it a habit to save receipts for all HSA-eligible goods and services, so they can easily reimburse themselves when they are ready, or when they need the money.

If you own an HSA, you can change your contribution amount at any time during the plan year, subject to the annual limit. (Annual contribution limits are set by the IRS each year.)

What happens if I contribute more than the IRS annual maximum? If your HSA contains excess or ineligible contributions you will generally owe the IRS a 6% excess-contribution penalty tax for each year that the excess contribution remains in your HSA. It is recommended you speak with a tax advisor for guidance.