Did I just accidentally launder money?

I’m going to call and ask about it tomorrow but in the meantime I wonder if there’s a standard answer that would likely be right whatever the particulars of this case may be.

Basically, I accidentally paid a medical bill twice using my HSA which I have through work. To my knowledge, HSA funds are only allowed to be spent on medical expenses. (And note: it’s not even just a withholding from my pay that goes into my HSA–my employer also contributes a matching amount.) However, the doctor refunded the money to me as straight cash. In this fashion, I have turned some of my HSA funds into regular cash funds in my checking account. Is this probably a no-no, or probably a yes-yes?

I did the same thing a year or so ago.
I got a refund from a hospital. In the memo it said that I paid the bill twice. I checked my records and, sure enough, I did. (I’m putting it on them, though, I pay my bills promptly, they must have sent it twice).
I just stuck it in my regular checking account. It would take an awfully through audit to find something like that. But it did dawn on me that over paying medical bills and then getting the refund would probably be a good way to siphon money out of an HSA.

Also, you didn’t launder money, if anything, you’d be committing tax fraud. When you launder money you actually DO pay tax on it. What you did is found away to take tax free money, earmarked for a specific type of expense and spend it as normal earned income and still not pay tax or a penalty on it.

My guess is that if this became ‘a thing’, people that can accept HSA payments, or at least large billers like hospitals and dr’s office (leaving out stores etc), might end up being required to make refunds in the same way the payment was made.

Like I said, when it happened to me, I just kept it. You could put it back in the HSA (remembering that it’s still from the same source) or keep it and on your tax return say that you kept it, pay the tax and the penalty.

Money laundering covers only money illegally acquired, although the mechanism for actual laundering which you described looks promising. :smiley: It was not a regular and recurring transaction; just a simple error. I’ll start getting suspicious if it happens all the time. And even if there’s an investigation, just prove it’s your own residual earnings net of all taxes.

It’s not money laundering, but it is a no-no. Your HSA almost certainly has a form for re-submitting improper reimbursements/payments. For my HSA it is called a “mistaken distribution” form. You send in a check and the money goes back in your HSA.

They do have disclaimers about tax liability, etc, but I’d think for a one-time event you are probably OK. The IRS website seems to back this up as well.

More here; Tax Advantaged Accounts | Wolters Kluwer

You should also be able to just submit additional claims for reimbursement to cover the amount you accidentally laundered.