Jaishree E. says, “I can’t thank you enough for your work educating the world about personal finances. The things you’ve taught me have been invaluable! Recently, I had a medical procedure and used my HSA to pay about $1,300, even though I knew I had already met my annual insurance deductible. Within a couple of weeks, my doctor’s office did mail me a check to refund the amount I paid. Is it possible to put it back into my HSA before the April 15 deadline to make contributions for last year?”
Thanks for your kind words and great question, Jaishree! I’ll answer it and review how to correct common health savings account (HSA) mistakes or resolve confusing issues that may come up. So stay with me if you have an HSA or are curious about how using one saves money.
What is a health savings account (HSA)?
An HSA is a savings account for the sole purpose of paying allowable healthcare expenses. It’s available when you purchase an HSA-qualifying health plan on your own or through an employer. You can make tax-deductible contributions that grow tax-deferred. Then, you can spend your HSA on eligible healthcare expenses entirely tax-free.
From doctor visits to over-the-counter medications to eyeglasses, you can pay a wide range of allowable medical, dental, vision, hearing, and alternative care costs using an HSA.
So, if you qualify for an HSA, it’s a terrific way to pay less tax and cut the cost of healthcare. However, they have strict rules you must follow or pay taxes and penalties.
4 Common HSA Mistakes and How to Correct Them
If you have an HSA, it’s surprisingly easy to make common mistakes. Fortunately, if you act quickly, correcting them and getting back on track isn’t difficult. Here are four common HSA mistakes to watch out for and ways to fix them.
Contributing too much.
Like a retirement account, an HSA has an annual contribution maximum. For 2024, if you have an HSA-qualified health plan for yourself, you can contribute up to $4,150. If you have an eligible family health plan (that covers you and someone else), you can contribute up to $8,300. Plus, if you’re over 55, you can contribute an additional $1,000 with either type of health plan.
The money you put in an HSA is tax-deductible, reducing your taxable income for the year and your tax liability. Interestingly, HSA contributions can come from you or someone else, like a family member or employer. Some employers incentivize you to choose an HSA-qualified health plan by contributing to your HSA monthly or quarterly.
But unlike employer matching for a workplace retirement account, employer contributions (or those from anyone else) to your HSA are included in the annual limit. That can make it easy to lose track and over-contribute to an HSA, especially if your employer makes variable contributions on your behalf.
Another situation when you could easily over-contribute to an HSA is after making a significant contribution early in the year but losing your HSA-qualified insurance before the end of the year.
Remember that when an HSA-qualified plan does not cover you, you cannot make HSA contributions. Your allowable limit for the year gets prorated based on when you lost eligibility.
What does using an HSA look like?
Let’s say you have HSA-qualified insurance for your family from January 1 through May 7, 2024, and then change jobs and select a non-HSA-qualified health plan. You’d only be eligible to make a prorated HSA contribution for five months of the year.
To determine your maximum contribution, you’d divide the maximum family contribution of $8,300 by 12 months for a monthly contribution of $691.67. Multiplying that by five months gives you a maximum contribution for the year of $3,458.33. You’d have to remove the excess contribution if you had already contributed more than $3,458.33.
If you become uninsured or no longer have an HSA-qualified health plan, you can still spend your HSA balance but can’t make new contributions to the account.
Like with a retirement account, it’s your responsibility to catch and correct excess HSA contributions. And it’s best to contact your account administrator for help cleaning up an overpayment.
Like with an IRA, you can make an HSA contribution up to your tax filing deadline for the previous tax year. For instance, you can fund an HSA for 2023 as late as April 15, 2024. That means you also have until your tax filing deadline to reverse an overpayment.
However, as with retirement accounts, HSA earnings on excess contributions are subject to tax. But the good news is that if you catch an overpayment immediately, the investment gain and tax due will likely be minimal.
How do you correct an HSA overpayment?
You know the answer to the ‘what is an health savings account?’ question, but do you know that you can overpay into an HSA?
If you over-contribute to an HSA and don’t correct it, or you choose to apply the excess to a future year, you must pay a 6% penalty on the excess every year it remains in your account. But if you catch the mistake before you file taxes (including any filing extensions), you can avoid the 6% penalty by withdrawing the excess plus any investment or interest earnings.
Remember to check your HSA contributions toward the end of each year and get help quickly to correct any overpayments. You might have some tax to pay, but the faster your account gets cleaned up, the less expensive your mistake will be.
Taking a mistaken distribution.
The second common HSA mistake is the one Jaishree asked about–taking a distribution you didn’t need. The IRS allows you to correct “mistaken distributions” that happen due to a reasonable cause that you can prove.
Paying for a healthcare expense with your HSA and later finding that your insurer covered it happens frequently. You should receive a refund as Jaishree did.
Another typical situation is mistakenly spending your HSA. For instance, you go grocery shopping and pull out your HSA debit card by mistake. The cashier charges $150 in groceries to your HSA, and you don’t realize the error for a few days. While it’s not a problem if something like that happens once or twice, you may get flagged by your HSA administrator if it occurs frequently.
No matter why you make an incorrect HSA distribution, you have until April 15 of the following year to return the funds, just as Jaishree mentioned. However, I recommend returning the money to your HSA as soon as possible so you remember. You could initiate a bank transfer or deposit a paper check into your HSA to reverse the transaction.
So, Jaishree, you should return the medical refund to your HSA. There’s typically a way to indicate that your HSA deposit isn’t a contribution but a return of funds to the account.
Spending on ineligible expenses.
A third common HSA mistake is using it for non-qualified expenses. For example, many people mistakenly believe they can pay cosmetic services, elective surgeries, and health insurance premiums with their HSA. Note that unless you’re collecting unemployment benefits or paying COBRA continuation coverage, you can’t pay insurance premiums with an HSA.
To be clear, you can withdraw HSA funds for a non-qualified expense. But if you don’t return the money by your tax filing deadline (typically April 15), it gets counted as taxable income, plus you’ll have to pay a 20% penalty.
While there isn’t an HSA police watching your every move, if you were involved in a tax audit, your mistakes could catch up to you with unwanted taxes and hefty penalties. So, make every effort to spend HSA funds only on qualified expenses.
You can find a list of IRS-approved healthcare expenses in Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.
Paying expenses for an ineligible person.
The IRS says you can only pay someone else’s healthcare expenses with your HSA if they’re your spouse or a qualified dependent. You can’t spend your HSA on a domestic partner or roommate, even if you pay the rent. Even if your finance or partner is on your HSA-qualified health plan, you can’t use your HSA money on their healthcare expenses.
If you mistakenly paid expenses for an ineligible person, you can return the funds to your HSA by your tax filing deadline. Otherwise, you could incur unwanted taxes and penalties in an IRS audit.