As the end of the year approaches, now is good time to review HSA contribution limits. Individuals who enrolled in the HDHP mid-year or had changes in their coverage type during the past year may be able to increase their contribution limit. Check below to see if you qualify.
Did you enroll in an HDHP mid-year?
If an individual becomes eligible for an HSA anytime on or before December 1st of any year (last-month rule), they may contribute the full contribution maximum for that year as long as they meet the “testing period”. The testing period states they must remain an eligible individual through December 31 of the following calendar year. If the individual does not remain covered by HDHP during this “testing period,” the extra amount (i.e., the difference between the amount actually contributed and the pro-rated amount that would have been allowed) must be included in the individual’s income and will be subject to a 10 percent additional tax.
Did you change coverage from single to family during the year?
Individuals with changes in coverage type during the year (i.e. single to family coverage) may also take advantage of the last month rule. For example, if an individual had single coverage during the year but switched to family coverage no later than December 1st, they would be eligible to contribute the family maximum for the tax year. These individuals are still required to meet the testing period and must remain covered in a HDHP through December 31st of the following year.
However, if an individual is unsure or knows that they will not keep the HDHP coverage through December 31 of the following year, pro-rating the contributions based on the actual HSA eligibility remains a choice and may be the better option for the individual.
For more information, see IRS Publication 969 (pages 5 & 6).