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.
Employment and health coverage changes are very common mid-year. Here are a few situations and what to remember:
You switched health plans mid-year.
There are three possible scenarios—let's discuss all three.
You switched from one HSA-eligible HDHP to another HSA-eligible HDHP.
This is easy. Your HSA contribution limit does not change.
You switched from a non-eligible health plan to a HSA-eligible HDHP.
If you fulfill the Last-Month Rule before the upcoming tax filing deadline, you can contribute the full annual limit. Note: If you choose this route, you must remain eligible for the following twelve-month testing period. Read through the article listed above to better understand.
If you don't fulfill or decide not to use the Last-Month Rule before the upcoming tax filing deadline, you can contribute up to a prorated limit.
Last-month rule
The "last-month rule" in the context of Health Savings Accounts (HSAs) allows individuals to make a full contribution to their HSA for the current tax year even if they were not eligible for the entire year, as long as they remain eligible for the following year. (See Testing Period.)
You switched from a HSA-eligible HDHP to a non-eligible health plan or Medicare
You can contribute up to a prorated limit from the month you enrolled in an HSA-eligible plan up to the month you became ineligible.
Source: Publication 969 (2023), Health Savings Accounts and Other Tax-Favored Health Plans.
You changed coverage (family or individual) mid-year.
For a change in status (family or individual contribution limit), the IRS employs the "Full Contribution Rule." Under this rule, an annual HSA contribution limit can only increase, not decrease. Let's look at the two possible options.
Option 1: Do the math. Calculate a prorated limit based on actual HDHP coverage (individual or family) for each month of the tax year, calculated monthly, added together, and then divided by 12 to determine the annual limit.
Option 2: Use the new limit. Apply the annual contribution limit for the entire tax year based on your actual HDHP coverage (individual or family) as of December 1.
Source: IRS Notice 2008-52, published in IRB 2008-25
From Individual to Family coverage
In this scenario, your maximum contribution limit will always be the family contribution limit.
From Family to Individual coverage
In this scenario, option 1 (prorated limit) will be your maximum contribution limit.
Family coverage reminder
If only one person (you) is covered under your HSA-eligible health plan, you now have individual coverage and must follow the prorated individual limit.
No changes are necessary if you still have two or more people (e.g., you + 1 other person) covered.