Health Savings Accounts: Handling mistaken distributions

Overview

The purpose of a Health Savings Account (HSA) is to pay for the qualified medical expenses of an HSA owner and his/her family on a tax-free basis. An individual makes deductible contributions to an HSA, and any distributions from the HSA used to pay for or reimburse previously paid qualified medical expenses are tax free. Following is a look at the general guidelines when an HSA owner has made a distribution by mistake, or what the Internal Revenue Service (IRS) refers to as an “HSA mistaken distribution.”

IRS guidance

IRS Notice 2004-50, Q&As-37 and 76 provide for the return of a mistaken distribution. The Notice states that if there is clear and convincing evidence that an HSA distribution was the result of a mistake of fact due to reasonable cause, the HSA owner may repay the mistaken distribution no later than April 15 following the first year he/she knew, or should have known, the distribution was a mistake. The Notice also indicates that an HSA custodian/trustee’s willingness to accept the return of mistaken distributions is optional, and for that reason each custodian/trustee should determine its acceptance policy.

Reporting

IRS reporting instructions indicate that an HSA custodian/trustee does not report a repayment of a mistaken distribution on Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information, nor does it report the original mistaken distribution on Form 1099-SA, Distributions From an HSA, Archer MSA, or Medicare Advantage MSA. If after an HSA custodian/trustee reports an HSA distribution an HSA owner returns that distribution under the mistaken distribution provision, the custodian/trustee must correct the previously filed IRS Form 1099-SA as soon as becoming aware of it.

Example—Return of mistaken distribution before IRS reporting

Andrea took a $1,500 HSA distribution on May 5, 2025, to pay for medical expenses. In July 2025, as the result of an overpayment she made earlier, Andrea’s health care provider refunded $100 to her. On August 20, 2025, Andrea returned the $100 mistaken distribution to the same HSA. Her HSA custodian/trustee completes a nonreportable deposit of $100 back to the HSA and on its data processing system reduces the original $1,500 distribution to $1,400. Andrea’s HSA custodian/trustee has no IRS reporting to correct as no reporting has yet occurred for 2025.

Example—Return of Mistaken Distribution After IRS Reporting

Mark took a $1,000 HSA distribution on December 2, 2024, to pay for medical expenses. In February 2025, as the result of an overpayment he made earlier, Mark’s health care provider refunded $100 to him. On March 30, 2025, Mark returned the $100 mistaken distribution to the same HSA. His HSA custodian/trustee completes a nonreportable deposit of $100 back to the HSA and depending on its data processing system, may need to reduce the original $1,000 distribution to $900. Mark’s HSA custodian/trustee must correct the 2024 1099-SA already sent to the IRS to report $100 less than originally reported.

Conclusion

An HSA owner is responsible for determining whether a distribution qualifies to be returned as a mistaken distribution and if so, how any corrected reporting might affect his/her federal income tax return. For these reasons, an HSA owner should seek professional tax advice prior to making a request to return such distribution(s). Additionally, an HSA custodian/trustee should have appropriate documentation to support the processing of such transactions.