Health Savings Account Accidental Transfer/Withdrawl

[spanel]

I have a client that accidently transferred $7000 to an HSA and moved it back out the next day. Bank wont help and sent forms showing both.

Is there anything I can do to wash this out and not cause an extra tax on the non health related distribution?

Thanks

Chris

[TaxGuyBill]

Was the HSA contribution legitimate? In other words, did he qualify to make the contribution, based on having a HDHP and other rules?

[spanel]

Was the HSA contribution legitimate? In other words, did he qualify to make the contribution, based on having a HDHP and other rules?

Yes

Chris

[BP.]

By chance any out of pocket medical expenses incurred during the qualified HSA eligible coverage period (even prior years, I think) that weren't paid with HSA funds?

[Rapid Robert]

Just to clarify, you are talking only about the early distribution penalty of 20%, because otherwise the deduction for HSA contribution cancels out the ordinary tax on distribution, correct?

"Exceptions. There is no additional tax on distributions made after the date you are disabled, reach age 65, or die."


"Is there anything I can do to wash this out and not cause an extra tax on the non health related distribution?"

No, but your taxpayer could retroactively die.

[Rapid Robert]

I have a client that accidently transferred

Funny thing, some people insist that car driving accidents be called "crashes", because the term "accident" somehow absolves the driver of responsibility, (FWIW, I don't agree). But under that theory, this was not an "accident", since taxpayer was fully qualified to make the HSA contribution. Sounds more like a case of regret, followed by a rash action that was not run by the tax professional first.

[TaxGuyBill]

No, but your taxpayer could retroactively die.

LOL. I love that. Thanks for the laugh!

[TaxGuyBill]

As for the original question, I think your taxpayer may be stuck.

If the "withdrawal" had been set up as a "return of excess contribution", then that would have undone it and there would be no problem, but it wasn't done that way. And because it wasn't really an "excess" contribution, I don't even know if that would technically be allowable in the first place. As Robert said, at first glance it seems like he just changed his mind (and screwed things up by withdrawing it).

[spanel]

Just a follow up.. I'm not sure it makes any difference... Client said they had some fraud on an account and moved over the balance from their main account to this secondary account (I guess forgetting that it was an HSA) and then moving the money to a new account the next day.

In retrospect they should have moved that money directly into a new account, not the HSA

Chris