HSA payback

[joanmcq]

Client spent HSA funds (family plan insurance) on same-sex spouse's treatment. HSA said the funds were not spent on qualified expenses due to DOMA, but client could pay back the amounts withdrawn and avoid a penalty. True? I'm not sure yet when the payback occurred or if there is a period involved like an overcontribution to an IRA.

Qualifier: I hurt my back and am suffering muscle-relaxer hangover. Client got a CP2000 notice for the HSA due to non-reporting of ANY of the draws (bad tax preparer for 2010) and I'm trying to clean up the mess. Not very good at researching right now and the deadline is drawing near.

[Burke]

I can find nothing on waiver of excise tax due to excess distributions. (Taxable & 20% penalty.) They may be thinking of the excess contributions rule where excess contributions can be withdrawn by the due date of the tax return, including extensions, AND IF the earnings on those excess contributions are also withdrawn.

[Gary2]

In theory, it could be treated as a rollover (similar to a do-it-yourself IRA rollover), but obviously the 60 day time frame expired a long time ago.

Any chance that the spouse could be treated as a dependent for medical expense purposes? Remember that the gross income test doesn't apply for this purpose. I'm not sure how the community property rules would factor in. Is it possible the HSA and/or any employer-plan medical insurance could be considered separate property, and may be enough to shift the balance of the support test.

Any other expenses that could be allocated against it? Remember that in 2010, the rule against non-prescription drugs didn't apply. As far as I know, there's no specific traceability, so if the HSA is established in January, you spend $100 for eyeglasses (or aspirin in 2010), and then in December withdraw $100 from the HSA, it can be treated as applying against that expense. (Aside: In 2010, the penalty was only 10%, not 20%.)

If the standard items don't help, then the last option is to accept it, go on a payment plan if necessary, and hope that by this time next year, DOMA will be overturned and you'll be able to amend.

By the way, it's too late now, but did anyone point out that the spouse could probably have had his or her own HSA? The only requirement for putting money into an HSA is being covered by a HDHP (and not have any disqualifying insurance). It doesn't matter if the insurance was through a same-sex spouse's employer. This is a DOMA loophole, which would have allowed them both to contribute up to the family plan limit (but obviously then they wouldn't want to amend to MFJ/MFS, or the excess contribution penalty would kick in).