Maximizing contributions to your Health Savings Account (HSA) can be a great way to save. HSAs are tax-advantaged savings accounts. They allow you to spend money on qualified medical expenses and save for retirement. If you are enrolled in a high deductible health plan (HDHP), and meet a few other requirements, you can open and contribute to an HSA.

Calculating your annual HSA contribution may seem as easy as knowing the IRS limit. However, your HSA contribution maximum can change if your coverage or status changes throughout the year.

Yearly contribution limits

The IRS determines the annual contribution limits for HSAs. These limits depend on your age and whether you have family HDHP coverage or not.

Contribution limits are for the tax year. The amount you can contribute is based on your status and eligibility on the first day of each month.

You can make the full contribution if you were HSA eligible for the whole year, or if you meet the qualifications of the “last month rule” (read on for more info on that rule). If you are eligible for part of the year, you will be subject to a prorated contribution limit.

Changing eligibility status mid-year

Your contribution maximum can change if your HSA eligibility changes during the year. This means if you either gain or lose eligibility at any time during the tax year.

Some people become HSA eligible because they get new insurance coverage at work. HSA eligibility always starts on the first of a month following eligibility. Here's an example:

• If you enroll in a HDHP on June 15, and you meet all eligibility requirements, you are HSA-eligible on July 1.

Some people lose their HSA eligibility because they enroll in Medicare coverage. To be HSA qualified a HDHP must be your only coverage. Enrolling in Medicare would make you ineligible to contribute to an HSA.

• If you enroll in Medicare starting June 1, you are ineligible to make HSA contributions for the month of June.

Changing coverage type mid-year

Your maximum HSA contribution can change when changing insurance coverage from an individual to a family plan or vice versa.

Some people may start out the year with an individual HDHP, but end up switching to a family plan because of a qualifying life event. This could include marriage, a spouse’s loss of coverage, or the birth of a child. Here's an example:

• You switch from individual to family coverage on April 15. That means on April 1 you were eligible for the individual limit, but on May 1 you will be eligible for the family limit.

Some people may start out the year with family HDHP coverage, but end up switching to individual coverage. This could include divorce or a spouse gaining other coverage. Here's an example:

• You switch from family to individual coverage on April 15. That means that on April 1 you were eligible for the family limit, but on May 1 you will only be eligible for the individual limit.

How to calculate your max contribution

Use the guide below to calculate your maximum HSA contributions for the year. To provide an example, we will use a person who is going from individual to family coverage on July 15.

Step 1: Figure out your eligibility month-by-month

For the first day of each month, determine if you will be HSA eligible, and for what type of plan.

Example scenario:

Step 2: Calculate your monthly max

Take the annual limit for each coverage type (individual or family) that you have, and divide by 12 to get the monthly limit.

Example Scenario (based on 2021 contribution limits):

• Individual, $3,600/12 = $300 per month

• Family, $7,200/12 = $600 per month

Step 3: Add a catch-up contribution, if applicable

If you are over age 55, you may contribute an extra $1,000 per year. If you were only eligible to contribute for a portion of the year, you must calculate how much catch-up contribution you can make.

• $1,000/12 = $83.33

• $83.33 for each month you were eligible.

Step 4: Add all months together

Now take the contribution limits for each month and add them together to get the total contribution limit for the year.

Example scenario:

The last month rule

There’s an important caveat to the info above — the “last month rule” (also called the “full contribution rule”). The last month rule says if you are HSA-eligible on December 1, then you can choose to contribute the full amount for the year, even if you weren’t eligible for the whole year.

There is a required testing period of twelve months. This means you must stay eligible through the end of the next year, or else you will face taxes and penalties.

The last month rule presents an opportunity for you to weigh the risks and rewards of making a full contribution. If you foresee no change to your job or eligibility status, then it may be the right thing for you to do.

It's a good opportunity for you to build up your HSA savings. But if you are planning on changing your job or changing your coverage, then it may not be the right move.

Maximize contributions to maximize savings

Maximizing contributions to your HSA can be an important part of financial planning. You can save money by using HSA funds on qualified medical expenses, grow your funds over time by investing your HSA, and save for retirement.

It’s important to make sure you follow IRS contribution limits, or else you could be facing taxes and penalties. Knowing your eligibility status and doing a few calculations, can keep you informed and aware of your limits.