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Mistaken HSA Distributions

Health savings accounts (HSAs) have become integral to many employers’ benefits packages, as they offer employees a valuable tool for managing health care expenses while enjoying tax advantages. However, administering HSAs is more than just facilitating contributions. It also requires understanding and involves addressing mistakes with distributions that employees may encounter.

This article explores the fundamentals of HSAs and common distribution mistakes and discusses how employers like you can support their employees in correcting these errors.

HSA Overview

HSAs are tax-advantaged savings accounts available to individuals enrolled in high deductible health plans (or HDHPs). They allow employees to set aside pre-tax dollars to cover qualified medical expenses, providing a triple tax advantage: contributions are tax-deductible, earnings grow tax-free and withdrawals for qualified medical expenses are tax-free. Contributions to HSAs can come from both employees and employers. Lastly, HSAs are subject to individual and family coverage annual contribution limits determined by the IRS.

Common Mistakes in HSA Distributions

Despite employees’ best intentions, mistakes in HSA distributions can occur. Some common errors include:

  • Using funds for nonqualified expenses – Employees may inadvertently use HSA funds for expenses that don’t qualify as medical expenses under IRS guidelines.
  • Overdrawing funds – Employees may withdraw more than necessary from their HSAs, leading to unintended tax consequences.
  • Depositing too much – Employees may contribute more than the IRS annual maximum, also resulting in tax consequences.
  • Failing to keep records – Inadequate recordkeeping can make it difficult for employees to track HSA transactions and verify the eligibility of expenses.

Supporting Employees in Correcting Distributions

As an employer, there are several ways you can support employees in correcting mistaken HSA distributions:

  • Educate employees. Provide comprehensive education and training on HSA rules and regulations, including eligible expenses, contribution limits and the consequences of nonqualified distributions. Offer resources such as workshops, webinars and informational materials to help employees understand how to use their HSAs effectively.
  • Encourage recordkeeping. Emphasize the importance of keeping detailed records of HSA transactions and medical expenses. Encourage employees to save receipts and documentation for all qualified medical expenses, as well as records of HSA contributions and distributions.
  • Offer guidance and resources. Ensure employees know where to turn for help if they have questions or need assistance with their HSAs. Provide access to knowledgeable benefits administrators, financial advisors or tax professionals who can offer guidance on correcting mistaken distributions and navigating HSA rules.
  • Communicate proactively. Regularly communicate with employees about HSA-related updates, such as contribution limit adjustments, changes to regulations and reminders about best practices for managing their accounts. Use multiple channels—email, intranet and employee meetings—to ensure that information reaches all employees.


HSAs provide employees with a valuable opportunity to save for health care expenses and offer significant tax benefits. As an employer, it’s essential to support employees in understanding and managing their HSAs effectively. 

By providing education, resources and guidance on correcting mistaken distributions, employers can help their workers make the most of their HSA benefits while minimizing potential pitfalls. Together, employers and employees can navigate the complexities of HSAs and achieve greater financial wellness.

Contact us for more employee benefits resources.

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