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Subsequent reimbursement for HSA distribution


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4 replies to this topic

#1 JDuns

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Posted 18 January 2011 - 03:31 PM

Assume a doctor submits a claim to an insurance company, which is initially denied. The patient appeals the denial. While the appeal is pending the patient takes an HSA distribution to pay the doctor's bill. The next year, the insurer overturns the initial claim's decision and pays the doctor. The doctor then refunds the intial payment back to the patient.

My interpretation is that there is no early withdrawal excise tax on the initial withdrawal because the participant had a reasonable basis for believing that the HSA distribution was to reimburse a qualified medical expense that had not been (and was not going to be) reimbursed by insurance. I do not think that this result is changed when the insurer subsequently decides the appeal.

In the year that the appeal is approved, the doctor's refund payment would be taxable income to the patient (applying analysis similar to the casualty loss rules). The refund cannot be redeposited into the HSA account (except perhaps as a funding source for otherwise permissible HSA contributions for the year).

Do you agree/disagree?

#2 MARYMM

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Posted 19 January 2011 - 02:45 PM

Assume a doctor submits a claim to an insurance company, which is initially denied. The patient appeals the denial. While the appeal is pending the patient takes an HSA distribution to pay the doctor's bill. The next year, the insurer overturns the initial claim's decision and pays the doctor. The doctor then refunds the intial payment back to the patient.

My interpretation is that there is no early withdrawal excise tax on the initial withdrawal because the participant had a reasonable basis for believing that the HSA distribution was to reimburse a qualified medical expense that had not been (and was not going to be) reimbursed by insurance. I do not think that this result is changed when the insurer subsequently decides the appeal.

In the year that the appeal is approved, the doctor's refund payment would be taxable income to the patient (applying analysis similar to the casualty loss rules). The refund cannot be redeposited into the HSA account (except perhaps as a funding source for otherwise permissible HSA contributions for the year).

Do you agree/disagree?



Why can't it be re-deposited to the HSA ? I just checked our provider's website and they have a Mistaken Distribution Form for participants to use in this type of situation. Here's an excerpt:

<snip>I certify that the above distribution was the result of a mistake of fact and I authorize xxxHSA to redeposit the distribution as a mistaken distribution.
I understand xxxHSA is not required to accept the mistaken distribution and I am responsible for any tax consequences that may result from the distribution <snip>

#3 Leo the Lion

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Posted 20 January 2011 - 02:20 PM

I'm inclined toward the mistaken distribution analysis, if it is feasible in this case (i.e., if the HSA trustee/custodian will accept the mistaken payment).

The HSA owner's position, as put forward in the initial question, is weakened by their knowledge that an appeal was pending (and their implicit or explicit belief that the claim should indeed be covered by the plan). This is inconsistent with the assertion that the participant had a reasonable basis for believing that the HSA distribution was to reimburse a qualified medical expense that had not been (and was not going to be) reimbursed by insurance. IRS Notice 2004-2, Q-26 says, in part, that an expense is only a qualified medical expense "to the extent the expenses are not covered by insurance or otherwise."

#4 jpod

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Posted 21 January 2011 - 02:36 PM

Let's assume that you can't put it back in the hsa on any kind of "mistake" theory.

You didn't identify the amount involved, but let's say it's $500. As long as the participant had at least $500 of other out-of-pocket qualifying medical expenses from the day he first became an HDHP/HSA participant up to the date of the HSA distribution, there's no tax consequence and no problem.

#5 JDuns

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Posted 21 January 2011 - 02:43 PM

The dollar amount (more than $10,000) cannot be absorbed by other unreimbursed medical expenses.