Distributed Funds from HSA without Knowledge by Institution
A bank closes an HSA because they believe the person may be dead or it is a lost asset. They send the money to the Unclaimed Property Division of their home state. Person does not want the money distributed and pay taxes on the money since the bank has sent out a 1099 distribution form. How do you fix this mistake? The withdrawal was not authorized by the account owner.
Permalink Submitted by Alan - IRA critic on Wed, 2019-03-06 18:39
Unless the HSA custodian had violated the escheatment law of the state, the mistake cannot be fixed. However, if the person paid qualified medical costs for the year of the distribution, they could file Form 8889 to avoid the reported distribution being subject to tax and 20% penalty. If records were kept the person could also apply the amount distributed (even though it went to the state) to reimburse themself for qualified medical expenses that were not deducted on Sch A, but paid in the past. Therefore, it is very possible that proper reporting would eliminate any taxes due. Of course, the person should also pursue reimbursement from the unclaimed property fund.