When this happens
You used HSA funds for something that turned out not to be a qualified medical expense, whether you realized it at the time or not.
Why it matters
The IRS taxes non-qualified withdrawals as ordinary income, and adds a 20% penalty unless you're 65 or older or disabled.
How to fix it
Step 1: Recategorize the transaction
Select the unqualified transaction under Transactions
Recategorize it as an Unqualified Expense
Enter the amount you spent on unqualified expenses
Enter the rest of the required details and submit
Step 2: Redeposit the funds to avoid the tax penalty
Select Deposit
Recategorize the deposit as a Reimbursement Correction
Enter the amount
Enter the rest of the required details and submit