First published: February 3, 2026 / Last updated: February 27, 2026

What happens if you use your HSA incorrectly?

Health savings accounts (HSAs) offer powerful tax benefits, but those benefits come with rules. If you use your HSA incorrectly, the IRS may assess taxes or penalties depending on the type of mistake.

The good news: most HSA errors are fixable, especially if you catch them early. This guide explains common HSA mistakes, the penalties that may apply, and how to correct them under current IRS guidance.

What counts as using an HSA incorrectly?

Using an HSA incorrectly generally falls into one of three categories:

• Spending HSA funds on non-qualified expenses
• Contributing more than the annual IRS limit
• Contributing while not HSA-eligible

Each situation is treated differently under IRS rules.

Penalty for non-qualified HSA expenses

If you use HSA funds for something that is not a qualified medical expense, the IRS considers it a non-qualified distribution.

If you are under age 65

• The amount is subject to regular income tax
• An additional 20% penalty applies

If you are age 65, disabled, or deceased

The 20% penalty does not apply once you reach age 65. It is also waived if the account holder becomes disabled (as defined by the IRS) or passes away.

In these cases, non-qualified withdrawals are still taxable as ordinary income, but no additional penalty is assessed.

Correcting a mistaken distribution (mistake of fact)

In limited situations, a distribution can be treated as a "mistake of fact due to reasonable cause" rather than an intentional non-qualified withdrawal.

If you have clear and convincing evidence the distribution was a mistake, IRS guidance allows you to repay the amount to the HSA by the tax return due date (not counting extensions) following the first year you knew or should have known it was a mistake. If corrected properly, the amount is not included in income and is not subject to the 20% additional tax.

How mistaken distributions work

• The mistake must be unintentional (for example, swiping your HSA card for a non-medical purchase)
• You must return the full distribution to the HSA
• The repayment must be completed by the due date of your tax return (not counting extensions) following the first year you knew or should have known it was a mistake

What happens if you overcontribute to an HSA?

HSA contributions are capped each year by the IRS. If you exceed the annual limit, the excess amount is subject to an ongoing penalty.

• A 6% excise tax applies to excess contributions
• The penalty repeats each year until corrected

This penalty is reported on IRS Form 5329.

How to fix an excess HSA contribution

To avoid or stop the penalty:

1. Withdraw the excess contribution
2. Withdraw any earnings on that excess
3. Complete the correction before your tax filing deadline (including extensions)

If corrected in time, the 6% penalty can usually be avoided entirely.

What if you were not eligible to contribute?

You can only contribute to an HSA if you are HSA-eligible. Common eligibility issues include:

• Being enrolled in Medicare
• Having non-HDHP health coverage
• Being claimed as someone else's tax dependent
• Using the last-month rule but failing to remain eligible for the following 12-month testing period

How the IRS knows about HSA mistakes

HSA activity is reported to the IRS through several forms:

• Form 1099-SA reports distributions
• Form 5498-SA reports contributions
• Form 8889 reconciles eligibility, contributions, and distributions

Discrepancies between these forms can trigger IRS scrutiny.

How to fix an HSA mistake

Most HSA errors can be corrected without severe consequences if handled promptly.

Fixing non-qualified distributions

If the distribution qualifies as a mistake of fact, returning the funds by the deadline can prevent taxes and penalties.

If not corrected, the distribution must be reported accurately, and any applicable taxes and penalties must be paid.

Correcting contribution issues

For excess or ineligible contributions:

• Request a corrective distribution from your HSA provider
• Report the correction properly on your tax return
• File or amend Form 5329 if required

What happens if you do nothing?

Ignoring HSA mistakes can make them more expensive over time. Excess contribution penalties repeat annually, and interest may accrue on unpaid taxes.

How to avoid HSA penalties going forward

• Confirm HSA eligibility before contributing
• Track contributions across all employers
• Save receipts for qualified medical expenses
• Understand eligibility rules like the last-month rule before using them

If you are unsure whether an expense qualifies, review what makes an expense HSA eligible before using your funds.

The bottom line

Using an HSA incorrectly does not automatically mean disaster. The IRS provides correction paths, and most mistakes are fixable under current rules.

With awareness, documentation, and timely action, an HSA remains one of the most valuable tax-advantaged accounts available.

Sources

• Publication 969 - IRS
• Instructions for Form 8889 - IRS
• Instructions for Forms 1099-SA and 5498-SA - IRS

Disclaimer

This page is for educational purposes only and is not tax or legal advice. Check with your HSA administrator or a qualified tax or legal professional if you have questions about your specific situation.