I Accidentally Used My HSA Card For Groceries: How to Fix It

I accidentally used my HSA card for groceries. Learn how to fix it, avoid penalties, and prevent future mistakes with this helpful guide.

We have all done it at some point or another, we are waiting in line at the grocery store, carrying too much and at the same time using the incorrect account without ever being aware. A day or two later, when we review our transactions, we are faced with it, you charged groceries on your HSA account instead of your debit account. It’s an easy financial mistake to make but is one that does have some ramifications for you to be aware of. 

In the event this ever happens to you, don’t panic. The article below will walk you through exactly how to fix the financial mistake, explore potential consequences, and equip you with tips for avoiding them in the future. By the time you’re done, you should be able to easily handle the situation and potentially avoid it in the future as well.

Using Your HSA for Non-qualified Expenses

We can begin at the beginning. Your Health Savings Account (HSA) is a wonderful resource for healthcare savings. It is a way for you to save pre-tax dollars for use in paying for eligible medical expenses such as a visit to a doctor, prescriptions, or medical supplies. The IRS does have some strict guidelines for when and how you can use them, though. Unfortunately, groceries are not on the approved list.

Using your HSA for non-qualified expenses such as groceries, clothes, or entertainment makes you use the account incorrectly. The IRS classifies this as a non-qualified distribution. That is when you would be subject to two penalties:

• Income Tax: The payment you have made will be taken into account as taxable income for this year.
• Penalty of 20%: The IRS charges another 20% as a penalty if you are below 65. The error is thus costlier than before.

But there is another catch: if you are older than 65, there is no 20% penalty but it will be taxable nonetheless. Either way, using your HSA card for purchases can be more expensive than expected.

My Own HSA Blunder

Yes, I have myself committed this faux pas. It happened on a Saturday morning and there were a bunch of things for me to do in town. My child is tugging at my arm, and there is a cashier waiting, and in desperation, I just took out whichever card happened to be handiest in my wallet. It wasn’t until later when I checked out my banking app that I noticed I’d charged at the supermarket on my HSA card.

I panicked initially. My imagination ran wild and had me imagining about IRS agents at my door or a freeze on my HSA account. It wasn’t the end of the world, though, after some research (and some breathing deeply). There are certain steps to follow in order to fix the mistake and avoid as much fallout as possible.

Tax Implications and Penalties You Should Know

Break down the financial implications for accidentally making purchases with your HSA card for non-qualified expenses. It is not as daunting as it may sound, but it is vital to know the guidelines in order to move quickly.

• The Taxable Amount: Let us say you accidentally spent $100 at the grocery store on your HSA card. That $100 is taxable as part of your annual taxable income. Assuming you are in a tax bracket of 22%, that is another $22 in taxes.
• The 20% Penalty: The IRS charges a 20% penalty when you’re below the age of 65. That would be another $20 in this case, and you’d have paid a total of $142 for a $100 bill for groceries.
• Special Rules for Age 65 and Above: If you are 65 or older, you will not be charged the 20% penalty but will have to pay tax on the $100.

The good news is, if you catch it early enough, there are no penalties at all for paying back your HSA.

Step-by-Step Solution to the Error

So, what can you do when you have mistakenly charged groceries using your HSA card? Correct this mistake and remain in compliance with IRS regulations by following these steps.

Step 1: Acknowledge and Validate the Mistake

First, double-check transactions in your HSA account for the correct purchase amount and purchase date. Was it really your HSA card or another one altogether? Keep your supermarket receipt handy for accurate documentation. It may sound trivial, but it is essential in making sure you are addressing the correct purchase.

Step 2: Reimburse Your HSA

The IRS allows for you to correct the mistake by paying back your HSA account in the following way:

• Return the exact amount of groceries back to your HSA account. Most HSA providers allow direct or check deposits.
• Make sure to flag the deposit as a payment for incorrect allotment. That way, the account is properly recorded.

You must file this payment prior to April 15 (the general deadline for filing taxes in the year in which there is a miscalculation) in order to avoid paying the income tax and 20% penalty.

Step 3: Record Everything

Keep meticulous records regarding the payment and the error. This includes:

• The supermarket bill for groceries.
• Banking statements for the real transaction and for payment back.
• Any correspondence with your H.S.A. provider.

Documentation is your best friend in the event that the IRS audits the transaction.

Step 4: If Needed, See a Professional

In the event that you are unclear about how to be reimbursed or have a unique situation, don’t be afraid to call a financial advisor or tax consultant. They can provide personal guidance and can ensure compliance with guidelines established by the IRS.

Tips for Avoiding Future Errors

Face it or not, things can get busy and we can easily confuse our cards. But there are some simple tips for avoiding this faux pas in the future.

1. Learn about HSA Rules

Take some time to familiarize yourself with what is a medical expense. The IRS has a thorough listing of eligible expenses, and it can be accessed online. Knowing the guidelines will allow you to plan better for when and how to use your HSA funds.

2. Utilize Individual Cards or Labels

If you’re like me and have multiple cards in your wallet, consider adding a brightly colored sticker to mark your HSA card or moving it to another slot. It is a simple thing, but can be a real game-changer.

3. Check Your Account Frequently

Set a reminder to review transactions in your HSA account at least once a month. Catching errors early makes correction possible before the tax filing deadline.

4. Activate Spending Notifications

Most banks and HSA providers offer usage alerting for when and how your card is being utilized. You can have them alert you when purchases are being transacted at sources outside of medical providers or pharmacies.

5. Bring a Secondary Pay Option Along

In making purchases of non-medical things, have as a habit to use a given debit or credit card. Keep it close at hand so you don’t mistakenly pick up another when in a rush.

Frequently Asked Questions (FAQs)

What if I don’t reimburse my HSA?

Unless you pay it back, it would be a non-qualified distribution. You would have to pay tax on it as income, and if you are younger than 65, there is a 20% penalty as well.

Can I reimburse my HSA after the tax deadline?

Yes, but the IRS does require repayment of your HSA before the filing deadline for when the mistake happened. If you are not able to meet this deadline, you will be required to pay tax and penalty.

Will My HSA provider slow me down?

Yes, there are penalties imposed by the IRS but not by your HSA provider. It is still best to correct the mistake in order to prevent tax implications.

Key Takeaways

• Spending your HSA funds on non-qualifying expenses can expose you to penalties and taxes.
• In addressing the mistake, you must pay back your HSA account before filing taxes.
• Keep accurate records for payment and transaction in avoiding issues in dealing with the IRS.
• Study about guidelines for HSA and incorporate strategies for avoiding future mistakes.
• Don’t be shy about seeking advice from a tax expert if need be.

Additional Resources

1. 5 ways HSAs can help with your retirement: Learn how HSAs offer triple tax savings and can be a powerful tool for retirement planning.
2. Your HSA Can Be a Tool for Saving for Retirement: Discover how HSAs can help you prepare for future healthcare costs and retirement while saving on taxes.
3. How To Use Your HSA As A Retirement Plan: Explore how HSAs can act as a supplementary retirement plan alongside traditional options.
4. 4 Tips To Maximize Your HSA: Practical tips to make the most of your HSA, from contributions to investment options.