HSAs are tax-advantaged accounts designed to help you pay for eligible medical expenses. Because they receive those tax advantages, they’re also heavily regulated by the IRS. As the account owner, you’re responsible for making sure that you’re only using HSA money on eligible items. And if you realize you bought something ineligible, you’re required to take action to correct it.
According to the IRS, if you’re under 65 years old, you will have to pay income taxes as well as a 20% penalty on any amount of HSA money you withdraw to purchase something ineligible. If you’re 65 or older, disabled, or deceased, then you will only pay regular income taxes (no penalty) if your withdrawal does not correspond with an eligible medical expense.
What should you do if you accidentally use your HSA funds for an ineligible service/item?
To avoid the penalty, use the following article to deposit money into your HSA.
Otherwise, you will need to report the amount on Line 16 of Form 8889 as a Taxable HSA Distribution and might need to pay for the penalty.
The 1099-SA Tax form will be updated with the correction.