Informational Purposes Only
The following content has been prepared for informational purposes only, and should not be relied on for tax, legal, or accounting advice. Consult with a tax professional for your own reporting purposes.
Finding your contribution limit this year will involve noting dates and some math 🤓
Eligible Individual Reminder
To be an eligible individual and qualify for an HSA contribution, you must meet the following requirements.
You are covered under a high deductible health plan (HDHP), described later, on the first day of the month.
You have no other health coverage except what is permitted under Other health coverage.
You aren’t enrolled in Medicare.
You can’t be claimed as a dependent on someone else’s 2023 tax return
The last-month rule
At a glance, the “last month” or “full-contribution rule” means that if you get new HSA-eligible plan coverage before December 1, you can contribute a full year’s worth of contributions into your HSA as long as you’re scheduled to be on an HSA-eligible HDHP for the following year.
Here’s exactly what it says inIRS Publication 969:
The IRS
“Under the last-month rule, you are considered to be an eligible individual for the entire year if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers). If you meet these requirements, you are an eligible individual even if your spouse has non-HDHP family coverage, provided your spouse’s coverage doesn’t cover you.”
Josh example: Applying the last-month rule
Josh, age 40, became an eligible individual on December 1, 2023. He has family HDHP coverage on that date. Under the last-month rule, Josh can contribute the family contribution maximum of $7,750 to his HSA when he files his 2023 tax return in April of 2024.
Testing period
Here's the catch: If you leverage the last-month rule and contribute the maximum amount, you must remain eligible for an HSA for the following year. (If December 1 2023, was the first day of your last month of the tax year, you must remain eligible from December 1, 2023, until December 31, 2024.)
If you fail to remain eligible, you'll have to do some math when filing your taxes for the following year. You'll:
Calculate the difference between your previous year's HSA contributions and the prorated amount allowable based on your actual eligible months.
Include the difference as income in the tax year you fail to be an eligible individual.
Pay an additional 10% tax on this amount.
The income and additional tax are calculated on Form 8889, Part III.
Josh example: Disqualifying event
December 1, 2023, was the first day of Josh's last month of the tax year, and he had family HDHP coverage on that date. Applying the last-month rule, Josh contributed a maximum of $7,750 (2023 family limit) to his HSA when filing his 2023 tax return in April of 2024.
However, Josh changed to a non-eligible health plan mid-July 2024, making him fail the test period. In his 2024 taxes, Josh must include the 2023 HSA contributions made due to the last-month rule as taxable income, and pay an income tax and an additional 10% tax on these funds.
Prorating can be easier
You should only employ the last-month rule if you are certain you will remain eligible for the following year.
Otherwise, it's safest to prorate your contribution limit every year and not exceed that maximum amount. Following this route is simpler and less risky. (I was only eligible in December, so I will pro-rate my contribution limit for 1 month.)
Prorating the contribution limit
The formula below is our guide to calculating the prorated contribution limit.
How to calculate your prorated contribution limit:
Note the annual contribution limit set by the IRS.
Count the full months you were eligible until the month you had a disqualifying circumstance.
Divide the number of eligible months by 12 to get the multiplier.
Multiply the resulting annual contribution limit and the multiplier from Step 3 to get the prorated contribution limit.
Josh example: Calculating prorated contribution limit
January - June 2024 = 6 eligible months
July 2024 - December 2024 = 6 non-eligible months
$7,750 * ½ = $3,875
$3,875 will be subject to income tax and an 10% additional tax.
Changed coverage from individual to family or vice-versa?
You'll have to use the same formula above to count your prorated limit for both your individual and family coverage this year. This is what that would look like:
Prorated Individual Limit + Prorated Family Limit = Actual Prorated Limit
Let's try that out!
(Below are examples of contribution limits. Please check the HSA contribution limit set forth by the IRS for any given year.)
In this example, Josh had family coverage for three months of the year. For nine months of the hear, he had individual coverage.
Prorated Individual Limit
$3,850 x 3/12 = $962.50
Prorated Family Limit
$7,750 x 9/12 = $5,812.50
Actual Prorated Limit
$962.50 + $5,812.50 = $6,775.0
Informational Purposes Only
The following content has been prepared for informational purposes only, and should not be relied on for tax, legal, or accounting advice. Consult with a tax professional for your own reporting purposes.